ARAB-US RELATIONS - Sept. 18 - Israel Shrugs Off Loan Action.

Israeli FM spokesman Jonathan Peled says his government would not be swayed by Washington's warning that it would trim the $9 bn loan guarantee if money raised was spent for the benefit of Israeli settlement in the occupied West Bank and Gaza Strip. He says: "It is not an issue that will affect government policy". (Israel this week raised $1.6 bn in a bond issue in the US, backed by the first tranche of the loan guarantee that the two sides signed last month. Subsequent tranches may, however, be affected by a condition of the agreement that allows the US administration to deduct every dollar the Israeli government spends outside its pre-1967 borders. Washington has yet to say whether the condition would apply also to the costs of the defensive barrier that Israel is building inside the West Bank). Peled says Israel would not be deterred from completing the barrier, which Pres. Bush has described as a "problem", but adds: "We want to reach an understanding with the US", saying that was why PM Sharon had deferred a decision on the barrier's final route. (The loan guarantee is aimed at helping the government to pull the Israeli economy out of recession by promoting growth. The aid depends on Israel pursuing an emergency economic plan submitted by Finance Minister Netanyahu. It can use the money to finance its current activities but has promised not to increase the budget deficit. The guarantee offered Israel considerable benefits but was not vital to its economic survival. Israel has never defaulted and could raise funds without US backing, but the loan guarantees allow it to borrow more cheaply. Some economists think this has a downside).