Foreign Relations of the United States, 1952–1954, The Near and Middle East, Volume IX, Part 1

784A.5 MSP/6–1853

No. 627
Memorandum by the Deputy Assistant Secretary of State for Near Eastern, South Asian, and African Affairs (Jernegan) to the Secretary of State¹

top secret

[Washington,] June 18, 1953.

Subject:

• Israel’s Short-Term Debt

Discussion

The Israelis are pressing DMS on this subject. Mr. Eban has written Mr. Stassen asking (a) for assistance in meeting a threatening financial crisis by making available to the Israel Government, to pay debts, $7 million remaining from unused 1953 appropriations already voted for Israel; and (b) for his intercession in securing a $75 million loan from the Eximbank to enable Israel to consolidate a portion of its present indebtedness. This amounts to $386 million, of which $111 million matures in the twelve months April 1953-March 1954. It is necessary to determine the Department’s position: to enable DMS to avail of necessary policy guidance; and to enable an appropriate reply to be made to the Israelis if, as is likely, they also approach the Department.

The debt of $386 million has gradually accumulated during the past four years, and without a substantial increase in private gifts to Israel there is no immediate prospect of reduction in its total. Debts are owing to the Eximbank, American and foreign private interests, and for liabilities arising out of current import transactions.

We are also informed that Israel’s current requests for military equipment to be purchased for cash from the U.S., Canada, the U.K., and France, total $40,000,000. A specific inquiry has been reported from London for 40 Centurion tanks.

The Israeli case is as follows:

1. Provision of $7 million forthwith will tide them over a present crisis, prevent default between now and July 31st.

2. Provision of a loan or grant of $75,000,000 would enable Israel to consolidate its debt and distribute future maturities on a manageable schedule, maintain its credit position with resultant economies in carrying charges, and prevent further impairment to Israel’s relations with the Arabs, who count on economic collapse in Israel and therefore are reluctant to talk peace. It would avert an internal crisis which might follow external default.

Embassy Tel Aviv, in Despatch 1262 of June 8th,² argues that the balance of evidence appears to favor averting a “general default.” A default would have serious political consequences within Israel, would encourage Arab intransigeance, and might have adverse effects on Israel’s ability to raise money from private sources abroad. The effect of default might put more power in the hands of extremists in Israel, and prejudice the sensitive border situation.

The case against meeting Israel’s requests is as follows:

1. An advance of $6 or $7 million will buy only a few weeks’ time, and therefore it is preferable to reach a decision, now, on the merits, rather than postpone it. The advance would reestablish the pattern of paying old debts, and thereby make it more difficult to avoid accommodating other creditors later. (But note that the few weeks “bought” are weeks in which Congress will still be in session, and the time gained might avoid special Congressional interest and action, and loss of what we have gained in presenting the Near East “package” program.)

2. There are no funds to provide a $75 million grant, and it is undesirable to seek a “political” loan from the Eximbank, for which no basis of repayment exists. Furthermore, assistance, whether by loan or grant, beyond that now contemplated in MSA legislation, would do violence to our fundamental Near Eastern policy, by weighting aid to Israel much more heavily than aid to Arabs.

3. This step might set a precedent in violence to this fundamental policy, as it is the first occasion when the present administration has had to decide on such an issue.

4. A default, or “moratorium”, by Israel might not necessarily result in upsetting the political situation in Israel and in the area.

NSC 129/1,³ paragraphs 14(a), and 14(f), and 17(f), provide general guidance.

There is general agreement at the staff level against support for Israel’s request for a loan or grant of $75,000,000, over and above funds programmed for Israel in 1953 and 1954 MSA legislation.

The case for acceding to the request for an immediate advance may be summarized as follows: We “buy” six weeks’ time and thereby: enable future policy to be determined in the knowledge of what FY 1954 appropriations are; we can review again our basic relations with Israel to determine anew policies on the grant aid program to Israel; we avoid probable Congressional entanglement which might work to the detriment of objective policy determinations; we give the Israelis a further opportunity to put their financial house in order, in the light of knowledge that no loan or grants are available in excess of present MSA legislative proposals. A hasty decision to decline the request would prevent further evaluation of the effect of the adverse forces in the Near East that such a decision sets in train.

Recommendations. That you advise Mr. Stassen: (1) The Department does not support any proffer of assistance, loan or grant, beyond amounts now contemplated in MSA legislation; (2) The Department has reluctantly concluded that it is not in U.S. interest to allow a default at this time, and therefore Mr. Stassen has our support in taking appropriate measures within the limitations of 1953 funds already voted for Israel to prevent such default; (3) Interagency discussion should continue on future policy with respect to Israel’s financial problems.⁴

1. Sent through the Executive Secretariat.
2. Not printed.
3. Document 71.
4. According to a note of June 22 by O’Connor attached to this memorandum and addressed to Jernegan, “the Secretary agreed to $7,000,000 only and disapproved the rest, after talking with Mr. Humphrey and Mr. Stassen.” A handwritten notation indicates that the Secretary agreed with the three recommendations contained in the last paragraph of Jernegan’s memorandum of June 18.