The United States administration plans to cut about $1 billion from the balance of its loan guarantees to Israel because of its investments in the settlements. The balance currently stands at $4.6 billion.

Washington has not officially informed Jerusalem of the cut. The assumption is that the announcement, and the decision over the exact extent of the cut, will come only after Barack Obama is sworn in as president next Tuesday.

Israel has used about $4.4 billion of the $9 billion in loan guarantees extended by the U.S. in 2003 in the wake of the war in Iraq and to help shore up the Israeli economy. The guarantees have assumed greater importance recently in light of the global economic crisis and the Finance Ministry intention to use the guarantees to secure foreign loans to help pay for the expected government budget deficit.

The loan guarantees arrangement specifies that the U.S. will reduce the guarantees by the amount the Israeli government spends on settlements in the West Bank. The U.S. embassy in Tel Aviv monitors that spending and the administration informs Jerusalem of the amount it is holding back from the guarantees.

In the past two years no such announcement was made, but in unofficial talks held recently U.S. officials indicated that the cut would be about $1 billion.

Prime Minister Ehud Olmert considered asking President George W. Bush to forgive all or part of the reduction, but no such request was made in the end, in part because Washington did not inform Jerusalem about a reduction in the guarantees.

The extent of the cut is subject to political influence. In the 1990s, under the previous guarantees arrangement, then prime minister Yitzhak Rabin succeeded in convincing Washington not to include the construction of the various bypass roads in the West Bank (allowing Jewish settlers to avoid Palestinian populations) as "investment in the settlements." He explained that although the roads lead to the settlements, they would also benefit the Palestinians. The administration of Bill Clinton, seeking to encourage Israel toward progress in the Oslo Accords process, accepted the request. In the end, $800 million to $900 million was cut from loan guarantees totaling $10 billion.

The assessment now is that the Obama administration will weigh the political situation carefully before deciding on a cut to the guarantees and may try to link it with Israeli measures beyond the Green Line.