New Documents Show Bush Aides Favored Helping Iraq : Loans: State Department and NSC urged continuing assistance, despite warnings of Baghdad’s A-testing.

WASHINGTON —  The State Department and the National Security Council urged President Bush to continue federal loan guarantees for Iraq in late 1989, despite evidence that Baghdad was testing ballistic missiles and stealing technology to make bomb-grade uranium, according to classified documents and interviews.

A month after the recommendation, Bush waived a provision of a federal law banning the Export-Import Bank from extending loan guarantees so that Iraq could buy U.S. goods. The law allowed Bush to extend the assistance if he determined it to be “in the national interest” to do so.

At the time, the Bush Administration was attempting to influence Iraqi President Saddam Hussein through a series of economic incentives and sales of U.S. technology. The newly obtained classified documents provide another example of how the pro-Iraqi policy flourished, despite warnings that Baghdad was developing a nuclear weapon and ballistic missiles.

Previous reports in The Times have identified intelligence warnings throughout 1989 that described Iraq’s efforts to obtain military technology through front companies. The new documents show that similar warnings were specifically set aside by the State Department and the NSC so that Export-Import guarantees could be renewed.

The bulk of U.S. economic aid to Iraq flowed through the Agriculture Department’s Commodity Credit Corp. However, loan guarantees also were provided by the Export-Import Bank, an independent government agency. The Times reported earlier that Bush had intervened twice on behalf of Iraq at the bank while vice president.

In the fall of 1989, the Administration ignored objections from several of its own agencies and approved $1 billion in new Commodity Credit Corp. loan guarantees for Iraq. When Congress banned new Export-Import Bank guarantees because of Iraqi attacks on that nation’s Kurdish minority, the State Department and the White House began to study whether Bush should reinstate the Export-Import aid.

On Dec. 8, 1989, then-Secretary of State James A. Baker III sent a memo to Bush recommending that the waiver be invoked and the aid renewed, according to documents and interviews. But there were concerns in some quarters over intelligence reports about Iraq’s recent testing of a ballistic missile and its theft of the uranium enrichment technology.

Documents indicate that Baker asked the State Department’s Bureau of Near East Affairs and its congressional affairs office to review the matter. In mid-December, those officials recommended invoking the waiver and dismissed the intelligence reports as flimsy.

“Data on the test is still sketchy and requires further analysis,” said the memo to Baker. “There are indications that it may not have been so great a step forward as the Iraqis would have us believe. In any event, Iraq has not made (and therefore broken) any commitments to us about missile proliferation.

“Meanwhile, however, neither the missile test nor recent rehashing of allegations regarding longstanding Iraqi efforts to obtain equipment for enriching uranium alter the situation with regard to Iraq sufficiently to warrant the sudden withdrawal of Ex-Im coverage.”

The memo concluded by saying: “The Near East staff and NSC agree with this assessment. We have amended the wording of your memo to the President to make it clear that we have taken these factors in account.”

The uranium-enrichment mention apparently referred to intelligence reports that Iraqi agents had stolen technology and specifications from URENCO, a consortium of European countries that enriched uranium for a variety of purposes.

In April, 1989, a top-secret U.S. intelligence assessment first detailed the involvement of Iraqi agents in obtaining nuclear technology with specifications identical to those used by URENCO.

The Times has previously disclosed that Baker and other officials received a top-secret CIA report in September, 1989, warning that Iraq was using front companies to obtain nuclear weapons technology.

On Jan. 5, 1990, a State Department memo informed high-level officials about new allegations “that components and technology for use in production of uranium enrichment centrifuges were supplied to Iraq through an elaborate procurement network” by a rogue employee of “the URENCO enrichment consortium.”

On Jan. 17, 1990, Bush notified Congress that he was authorizing the Export-Import Bank to resume making loan guarantees to Iraq.

According to a classified State Department cable, the waiver was granted even though Iraq’s then acting minister of finance had told a State Department official that Iraq no longer needed the credit. The cable says that the Bush Administration wanted to provide the credits anyway as a protest against congressional assertions that Iraq was a terrorist state and therefore an inappropriate recipient for such aid.

The waiver would serve as “a political statement that we oppose the unfounded allegations that led Iraq to be included in the same category as Libya, Syria and Iran,” the cable says. Those nations were formally cited by the government as supporters of terrorism and ineligible for U.S. aid.

Waas is a special correspondent and Frantz is a Times staff writer.