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U.S. Uses Loan to Punish Israel for West Bank Construction

By Glenn Kessler
Washington Post Staff Writer
Wednesday, November 26, 2003; Page A17

The Bush administration will deduct $289.5 million from loan guarantees to Israel to penalize it for building settlements in Palestinian territories and constructing a fence snaking through the West Bank, administration officials said yesterday.

The largely symbolic decision -- which was officially characterized as a voluntary reduction in a $1.4 billion loan Israel will float next week -- comes as the administration has also stepped up pressure on both Israeli and Palestinian officials to restart the stalled peace process. Israeli Prime Minister Ariel Sharon has indicated some flexibility in the past week in dealing with Palestinian concerns, and U.S. officials increasingly believe Palestinian leader Yasser Arafat is close to agreeing to implement six security steps sought by the administration.

The $289.5 million figure resulted from weeks of negotiations between national security adviser Condoleezza Rice and Dov Weisglass, Sharon's chief of staff. Officials in the two governments disagreed yesterday over whether it included the cost for the fence separating Israelis and Palestinians in the West Bank, something the Bush administration fears could be used to establish the borders of a potential Palestinian state.

U.S. officials said the figure was about $40 million higher because of the fence construction, while an Israeli official said, "From our point of view it does not include the fence."

Both sides left enough room for multiple interpretations. The official White House statement on the matter did not mention the settlements, referring instead to "U.S. policy concerns and U.S. law regarding activities in the West Bank and Gaza." The Israeli statement said it "understands that the U.S. should not finance directly, or indirectly, activities with which it does not agree."

Under the legislation establishing the loan guarantees, Israel can borrow as much as $3 billion each year with U.S. backing for the next three years. The U.S. guarantee saves Israel as much as 1 percentage point on the annual loan rate, meaning the actual cost to Israel for the loan deduction is about $3 million in annual interest costs -- with the portion relating to the fence accounting for $400,000 a year in additional interest.

The administration has held detailed discussions with Israelis on the route of the fence -- a 60-yard-wide complex of ditches, 25-foot-high walls, electronic sensors, roads and steel barriers -- as Israel has proposed to have it veer into Palestinian territories to protect Israeli settlements. The fence is enormously expensive, with a final cost possibly topping $1 billion, and so the administration's deduction is a relatively small portion of the money spent so far.

But Israeli officials have long maintained that the fence is related to Israeli security, not the settlements, and officials are concerned about the precedent the deduction would set, especially if Israel decides to push farther into the West Bank to protect settlements. The settlement movement forms the core of Sharon's political base.

With a new Palestinian cabinet sworn in, the administration has also attempted to jump-start the peace process. After weeks of discussions between the White House and Israeli officials about a range of vexing issues, White House aide Elliott Abrams met secretly with Sharon in Rome last week to press him to take some unilateral steps to assist the Palestinians.

Since the meeting, Sharon has said Israel would not take steps to disturb a Palestinian cease-fire, if one is achieved; pledged to dismantle settlement outposts more energetically; and even suggested moving some settlements as part of a final peace deal.

The administration has also pressed the Palestinians to begin implementing a six-point package of incremental security steps first outlined by Mideast envoy John S. Wolf in August. The measures include closing tunnels in Gaza used by smugglers, freezing bank accounts of militant organizations, collecting arms at checkpoints manned by Palestinians, and shutting down mortar and rocket factories.

U.S. officials have told the Palestinians that this package could be carried out without provoking a civil war, and Arafat is said to agree with that assessment, officials said.

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