884A.10/3–1053: Telegram
No. 587
The Secretary of
State to the Embassy in
Israel
863. Embtel 1426.1 Israel Government represented by Eban, Sherman, Shalit and Lewin has made similar presentation here to that described reference telegram, except for strong implication that assistance relieve Israel Government of short-term debt burden should come before June 30, and argument that transferability provisions Mutual Security Act makes this feasible. Request was made for roughly $70 million in grant funds to meet debt estimated $98 million in payments falling due during period April 1, 1953 to May 30, 1954, less about $28 million in normal lines of credit. Representations were made that reduction in level indebtedness would be permanent.
Department finds Embassy–TCA comments very helpful and concurs that if funding operation undertaken it should generally follow lines reference telegram.
Following appear to be major arguments in favor operation: (1) Unless assistance granted Israel may default during forthcoming fiscal year. On economic side this would (a) probably cause immediate termination all bank and most commercial lines of credit; (b) cause serious disruption flow consumers goods and raw materials until purchasing placed on cash basis; with major portion dollar income already pledged to banks, transfer to cash basis might be delayed until after severe hardship caused Israel population. On political side default would (c) be harsh psychological blow to Israel people which would probably shake confidence in present moderate Government; (d) encourage Israel Government to follow policy of desperation; (e) provide evidence to Arab states of success boycott, tend to reverse present trend toward acceptance Israel as permanent feature Near East and upset slow improvement in political climate which US hopes will eventually lead to peace; (2) Funding would decrease extra cost (estimated $7 or $8 million annually in direct and indirect charges) of maintaining present short-term debt, which now reduces free dollar exchange available and reduces impact U.S. aid; (3) Operation would relieve high Israel officials of time-consuming and difficult problem of turning over short-term indebtedness; Israel Government generally is now subjected difficulty [Page 1157] of making constructive plans because credit problem interferes with ability plan effectively.
While recognizing these arguments, Department weighing other factors: (1) Severely adverse affect on U.S. relations with Arab world of such additional assistance to Israel; (2) Possibility that release Israel officials from discipline imposed by necessity turn over short-term loans may be premature, and result in less careful fiscal management; (3) It would be difficult, most likely impossible over extended period, for IG to avoid building up new short-term indebtedness as result improved credit position, thus nullifying long-term effect of operation; (4) Precedent of bailing out Israel creditors may lay U.S. open to heavy pressure to bail out other important and influential U.S. creditors at some future time and may also open U.S. to similar demands from other countries; (5) Practical difficulty finding funds this purpose because of scarcity of and legal limitations on grant-aid funds, and difficulty obtaining convincing demonstration that repayment loan funds would be assured. Further Embassy comments, particularly on factors (2) and (3) immediately preceding, will be welcomed.
Department has initiated discussions problem which include representatives Treasury and Export-Import Bank. Apparent from early conversations that it would be very difficult find Mutual Security Act or loan funds for this purpose before June 30, even if decision were made that U.S. assistance warranted. Decision unlikely immediately in view complexity matter. Department hopes take advantage Ambassador’s return air problem thoroughly before final decision made.