176. Memorandum of a Conversation, Department of State, Washington, December 5, 19601
SUBJECT
- Israel Economic Assistance Request
PARTICIPANTS
- Avraham Harman, Ambassador, Embassy of Israel
- Avraham Salmon, Economic Counselor, Embassy of Israel
- Aryeh Manor, Economic Minister, Embassy of Israel
- E—Edwin M. Martin
- NEA—Howard R. Cottam
- NE/E—Randall S. Williams
- NE—William L. Hamilton
Ambassador Harman recalled the several discussions held this year with United States officials in which Israel had asked U.S. assistance in financing extraordinary security expenditures. He said the U.S. response constituted very welcome assurances of willingness to consider assistance, outside the military field, but in a manner which would lighten Israel’s economic burden. The Israelis had been given to understand that the best approach was through the Development Loan Fund which might consider submissions up to a figure of $40 million. Submissions of this magnitude had been prepared but had now encountered two serious snags.
The first of these is related to the Export-Import Bank’s interest in three projects totalling $18.2 million which the Bank is prepared to finance on a dollar-repayment basis, whereas the Israelis had hoped to obtain DLF financing with the advantage of repayment in local currency.
The other difficulty is that the Bank is reluctant to consider a $30 million line of credit unless tied to specific projects. A $15 million housing loan application is still under consideration but the Israel Government understands that the DLF is obliged to regard it from a standpoint of world-wide housing policy which may mean its rejection. Thus, Israel’s hopes of loans totalling $40 million have shrunk to prospects of a $10 million loan to the Industrial Development Bank of Israel.
In sum, according to the Ambassador, Israel’s prospects of receiving the balance-of-payments type assistance so urgently required to offset its extraordinary defense expenditures are far from promising.
Ambassador Harman said he wished to draw Mr. Martin’s attention to three specific points:
[Page 388]First: In discussions with Mr. Dillon, the Ambassador several months ago and Mr. Eshkol in September, had inquired into the possibility of assistance from the contingency fund which of all types of indirect aid would provide the most immediate relief of a balance-of-payments type. Mr. Dillon had replied that this was a request which could not be considered before the second half of the fiscal year. Ambassador Harman said he hopes this possibility can now be reviewed, the U.S. to bear in mind that such assistance would finance expenditures in this country.
Second: The loan for $13.2 million which was first submitted to DLF, but in which the Export-Import Bank has expressed an interest, would meet the dollar component of a I₤ 100,000,000 agricultural consolidation program. The $30 million line of credit requested of the Export-Import Bank would have been expended for general dollar import requirements and the counterpart thus generated would have been lent to farmers. The Government of Israel now would like to suggest that if the Bank wishes to finance the $13.2 million loan, the positions of the two applications might be reversed, the Bank to retain the $13.2 million, DLF to consider the $30 million line of credit.
Third: In recent discussions with the DLF on the $10 million loan to the Industrial Development Bank of Israel, U.S. officials seem to be hinting that this loan might be made in two installments of $5 million each. Israel would prefer to receive it in one installment.
Ambassador Harman stressed the difficulties Israel is encountering in tying its applications to specific projects and still obtain the desired balance-of-payments impact. As is apparent from the Export-Import Bank’s willingness to consider projects the Israelis had hoped could be financed by DLF, the possibility of manipulative variations in Israel’s requests for investment program loans is about exhausted.
Mr. Martin assured the Israelis that the sympathetic interest Mr. Dillon expressed to Mr. Eshkol continues unchanged in this Government, but to translate that sympathy into favorable decisions on loan applications remains a difficulty which has not been eased by recent developments. U.S. agencies are under very heavy pressure to relate assistance directly to projects, not only by the terms of the legislation but by prevailing opinion among legislators. The Administration is not entirely satisfied with this obligation because it does limit the flexibility with which problems can be considered. Mr. Martin commented that he would have thought a country as advanced as Israel in the techniques of government administration and economics would not find it as difficult to formulate eligible projects as less advanced countries.
[Page 389]As for the contingency fund, Mr. Martin pointed out that much less had been appropriated than requested, and critical problems in Latin America and Africa are imposing very serious drains on the fund. While he would not entirely rule out the possibility of assistance from the contingency fund, he certainly could not be hopeful.
With reference to the agricultural application, Mr. Martin reminded the Israelis of the legislative history and U.S. aversion to making loans for local currency uses. The prevailing sentiment is that this should be a responsibility of the government concerned. Congressional disinclination to favor such loans is reinforced at present by the Presidential Directive addressed to the outflow of gold.2 The DLF will make some loans for local currency when special circumstances demand but only in cases of real emergency. The United States already has substantial holdings of Israel currency. Making these available is not the assistance Israel has in mind, of course, but the fact of their existence is another obstacle to consideration of loans for local currency purposes.
Ambassador Harman remarked that it had been Israel’s intention to expend all loan proceeds for U.S. imports.
Mr. Martin said that while it is general policy to require expenditure of loans for United States exports it is also intended that such loans will result in a net increase in a borrower’s U.S. purchases and not be used to finance normal requirements from the U.S.
Mr. Martin said he does not believe the Israelis need worry that the $10 million IDBI loan would be handled in two installments.
At Mr. Martin’s invitation Mr. Manor explained that the pound equivalent of the $15 million housing loan would be lent as “seed” capital to the Central Mortgage Bank of Israel and two or three other non-governmental home financing institutions. It was hoped that the loan would generate perhaps $40 million in home construction.
Mr. Martin said the U.S. is moving very gingerly into the field of housing, having long regarded it as related to consumption rather than production. We considered it better to devote our limited resources to economic development activity which has a multiplier effect on a nation’s economy. These requirements were of proportions to which we could address our aid with some hope of accomplishment, whereas anything we did in housing would merely scratch the surface of a problem of immense dimensions. The “seed” capital approach is regarded with favor by the United States because of its encouragement to private saving. Thus far, it has been U.S. policy to require the recipient government to establish government institutions similar to [Page 390] our Federal Housing Agency rather than make loans to individual banks. No such assistance is now contemplated outside Latin America, but the possibility of it being extended should not be excluded.
Finally, said Mr. Martin, the Development Loan Fund has not received an appropriation at the level desired and lending capital will soon be exhausted. A supplemental appropriation will be requested and we have some hope that the request will be regarded sympathetically. Mr. Martin commented that Export-Import Bank’s interest could be explained in part by the fact that it has a $2 billion lending authority, while the DLF has practically nothing at the moment.
In explanation of Israel’s preference for DLF over Export-Import loans, Mr. Manor mentioned the 53/4% interest rate of the Bank and its 12-year repayment requirement as compared to DLF terms of 31/2% to government and 53/4% to private borrowers on much longer terms. More important is Israel’s desire to avoid an increase in its dollar obligation. Export-Import Bank’s 12-year repayment is not long enough in view of dollar liabilities Israel is already obliged to service. Another factor is that the farmers who would receive the local currency counterpart of the loan would not be able to repay in less than 30 years the money Israel would be repaying in 12 years.
Mr. Manor referred to Mr. Martin’s suggestion that the U.S. not only wanted the expenditures made in dollars but to represent additional purchases. He observed that Israel knows what its imports from the United States have been and that they are now on a downward trend owing to the fact that European prices are 15 to 25% lower. If DLF were to make a loan of the type requested it might be difficult to prove in every individual case that the purchase would not otherwise have been made, but there is no doubt that such financing would add to the amount of goods purchased in the U.S. However, Israel is in a position to oblige importers to buy from the United States if the differential is no greater than 15% as compared to European items.
Ambassador Harman commented that Israel would control the direction of its imports by its licensing system. As an example, while the agricultural consolidation loan is under consideration the Government has stopped all imports of Massey-Ferguson tractors from England. Tractors are badly needed; the British price is favorable, but import licenses will not be issued until a decision is reached by the DLF.
Mr. Martin agreed to give the problems raised by the Israel representatives earliest possible consideration in view of the fact that the Embassy here may have to send representatives to Paris to meet Israel budget officials to discuss parliamentary presentation later this month.