ANNOUNCER: From Washington, Crossfire. On the left, Mike Kinsley. On the right, Oliver North. Tonight, Back to the Table. In the crossfire, Abdel Raouf El-Reedy, Egyptian Ambassador to the United States. And Zalman Shoval, Israeli Ambassador to the United States.

MIKE KINSLEY: Good evening. Welcome to Crossfire. Palestinian negotiators arrived in Washington today to resume peace talks with Israel. The Palestinians had threatened to stay away over Israel's decision to expel 12 Arabs from the occupied territories. The expulsions are in retaliation for the killing of a Jewish settler in the Gaza Strip. Got that so far? OK. On Monday, the United Nations Security Council voted to, quote, 'strongly condemn the Israeli expulsion of the Palestinians.' The United States supported that condemnation and the Palestinians then agreed to resume the talks. Meanwhile, another struggle is about to resume over $ 10 billion of loan guarantees that Israel wants from the United States. The Bush administration wants assurances that the money will not be spent to build Jewish settlements in the occupied territories. I hope that's all clear. Over to you, Ollie.

OLIVER NORTH: Mr. Ambassador, since Sadat the Egyptian government's really the only Arab government really trusted by the Israelis. How long is it going to be before the Mubarak government steps up to its real responsibilities and brings its Arab brothers to the point where they do the logical first thing for a successful peace talk, recognition of Israel?

ABDEL RAOUF EL-REEDY, Egyptian Ambassador to U.S.: We are doing all what we can. As a matter of fact, Egypt played a critical role in initiating this peace process because we are convinced that the region is at a crossroads and what we would like to do is to have this peace process as a vehicle to bring a new era where the Middle East will have a new region of order which would fit with the international order, the new international order, but in order to have this in place, you have to have sense of justice, sense of fairness. You have to have the Palestinians, who have suffered for so long, you have to have them achieve and attain their own basic rights --

NORTH: You've said all the right things --

AMB. EL-REEDY: -- have self determination. You have self determination for every people in the world and I think the Palestinian people are equally entitled to have right to have self determination.

NORTH: I don't believe there's anybody at this table that's going to dispute the right of the Palestinian people to have their own homeland.

AMB. EL-REEDY: Self determination.

NORTH: But you've just said all the right things. Here you are in the role of the honest broker.

AMB. EL-REEDY: Yes.

NORTH: Can't you get your Arab brothers to the point where the logical first step, recognition for Israel, just like you gave --

AMB. EL-REEDY: That's my --

NORTH: -- takes us there to begin with?

AMB. EL-REEDY: Recognition of Israel is a legitimate point and the Arabs have accepted 242 which speaks about the recognition of Israel, but not only recognition of Israel -- you have to have the recognition of the other important principles, land, the return of the land, the right of the Palestinian people to self determination. These are very --

NORTH: It seems to me we're stuck where we were --

AMB. EL-REEDY: It's not only -- it is recognition, of course. This is a legitimate point with which we have -- we are in peace with Israel. President Mubarak called Prime Minister Shamir the other day on the phone and we have -- bilaterally we have very good relations and --

NORTH: How about reaching out and bringing some of your brothers in?

AMB. EL-REEDY: Exactly, exactly. Our brothers, some of our brothers arrived today. However, the other brothers are arriving tomorrow. We are going to meet all in a multilateral negotiations for this, a new era, a new era.

KINSLEY: Ambassador Shoval, you're usually on my side over here. Tonight only you're over there. So, let me ask you -- I want to ask you a little bit about this U.N. resolution condemning Israel which your government is very resentful of. A settler, a Jewish settler is killed on the Gaza Strip. The Israeli government expels 12 Palestinians. Is there any evidence that these 12 Palestinians were involved in killing that settler?

ZALMAN SHOVAL, Israeli Ambassador to U.S.: These 12 Palestinians were going to be deported. They have a right to appeal to the Israeli supreme court. There's, too, due legal process. They are among the ring leaders of three terrorists organizations who are involved in killings, not just the settler in the Gaza Strip, but there was a woman a month ago, there was a man six weeks ago. We have not done anything. We have not deported anyone but, you know, there's a limit. It's not a retaliation.

KINSLEY: It has nothing to do with the killing of this settler?

AMB. SHOVAL: Yes, it's a preventive measure in order to prevent further killings and there is our duty as a power, as an occupying power even, not just as the Israeli government, to prevent violence. Let me say perhaps --

KINSLEY: Let me ask --

AMB. SHOVAL: Just one thing.

KINSLEY: Sure.

AMB. SHOVAL: You know, in conjunction with what we said -- with what you said before, President Sadat came to Israel --

AMB. EL-REEDY: Yes.

AMB. SHOVAL: -- without conditions. He broke the psychological barrier. The Palestinians and the other Arabs don't even want to communicate with us at this time. You know that.

AMB. EL-REEDY: You know that they have been there.

AMB. SHOVAL: And that is the big difference. I'm trying to get --

AMB. EL-REEDY: They have been communicating with you --

AMB. SHOVAL: Well, not between meetings --

KINSLEY: All right. I want to -- this is getting too palsy. I want to get back to this resolution and these expulsions one more time. You said that these are occupied territories and you were acting in your military capacity --

AMB. SHOVAL: Yes, that's all right.

KINSLEY: Well, that goes to the kernel of the problem. How can Israel have it both ways? If they're occupied territories, they're a legitimate subject for negotiation and potential return --

AMB. SHOVAL: Yeah, that's what we say.

KINSLEY: If -- that is not what your government says.

AMB. SHOVAL: Oh, yes, it is exactly.

KINSLEY: Your government accepts the principle of land for peace?

AMB. SHOVAL: No, our government says this is disputed territory. We say it's ours. The Palestinians say it's theirs. OK --

KINSLEY: Does your government say that it's prepared to negotiate about the future sovereignty over those territories?

AMB. SHOVAL: Our government says we want to have unconditional negotiations, the Palestinian side can raise anything they want, we can raise anything we want.

KINSLEY: Are you prepared to give some of that land back for peace?

AMB. SHOVAL: What do you mean back? They never had it.

AMB. EL-REEDY: What do you mean?

KINSLEY: Give it --

AMB. EL-REEDY: What do you mean? It's their territory.

AMB. SHOVAL: There never was a Palestinian --

KINSLEY: All right. Forget a Palestinian -- are you prepared to give it to any Arab --

AMB. SHOVAL: Legally, historically, morally we have -- I don't say it's all ours but we say we have at least as good a claim as anybody else. The negotiations are going to settle whose land that is.

NORTH: Let me -- before we dissolve.

AMB. EL-REEDY: That land belongs to the people who live there. Let's --

AMB. SHOVAL: But we live there before and we live there much longer --

AMB. EL-REEDY: But these people have been living there and they are entitled to have their own land.

NORTH: Giving up land for peace sounds very simple --

AMB. EL-REEDY: And this is one of the basic principles upon which Security Council Resolution 242 which is the basis of the settlement and Ambassador Shoval, my good friend, referred to the Egyptian-Israeli peace treaty. How was this possible? It was possible because Israel returned all the Egyptian occupied territory --

NORTH: That's not the real issue. The real issue is trust.

AMB. SHOVAL: Sinai was never ours.

AMB. EL-REEDY: OK.

AMB. SHOVAL: And it was never ours --

AMB. EL-REEDY: And Palestine belongs to the Palestinians.

KINSLEY: Are you saying that the West Bank is yours legally?

AMB. SHOVAL: We are Palestinians as much as they are. We were there much before they were.

NORTH: Let's not go back to biblical history. Let me just ask the real question. It's not really an issue of land. The real issue is a matter of trust. Suppose land is given up. How can the Israelis, the average Israeli in the street really be sure that moderate Arab leaders like Mubarak, even the modern Palestinian leaders, are going to be able to control the most radical elements that threaten the very existence of Israel?

AMB. EL-REEDY: Of course we will have -- everybody will have to make that commitment. We will be part of the agreement. The United States, other powers will be there, and in order to have trust, you have to have fairness. You know, these Palestinians have been living there all their lives, generation after generation. When you deny them every right, when you -- and this practice of deportation -- deportation is one of the most abhorred practices ever.

KINSLEY: Let me ask Ambassador Shoval about that very point.

AMB. EL-REEDY: When you treat people like that --

KINSLEY: Quiet --

AMB. EL-REEDY: -- how can trust come?

KINSLEY: You're going to get your answer. It is very odd, isn't it, this form of punishment of expulsion? I mean, these are not people who came to these territories. These are people who were there. Now, if they've done something wrong, try them, put them in jail, but what is this business about uprooting them from where they spent all their lives and dumping them in some country they've never lived in?

AMB. SHOVAL: Well, first of all we don't dump them, we send them to another Arab country. We send them really to people who are their own people, that's number one. Number two, if we would have put them on trial -- and we may one day, like in this country for instance. How would this country would have fared with them? How would it treat them? Put them on trial, OK. How are they going to treat in this country a killer? They're probably going to execute them. Israel does not want to have the death sentence. We are not going to execute, we don't want to create martyrs. We think it's more humane-it's also more effective-to deport those people into another Arab country until peace arrives. These are not civilian people, these are not peaceful citizens, these are terrorist leaders and let me just tell you --

KINSLEY: Very briefly.

AMB. SHOVAL: -- that just the day before yesterday this peaceful organization, al-Fatah, Arafat's organization issued an announcement calling for increased violence, saying we are against a political settlement --

KINSLEY: All right. I've got to cut both of you off.

AMB. EL-REEDY: How can --

KINSLEY: I've got to cut both of you off and --

AMB. EL-REEDY: I have to say that state deportation and expulsion of people are practices which are never acceptable by --

KINSLEY: OK, all right, excuse me, I've got to cut you both off --

AMB. EL-REEDY: -- civilized people.

KINSLEY: I've got to cut you off.

AMB. EL-REEDY: Put them on trial or --

KINSLEY: We're not going to deport you but I'm going to quiet you down for a moment. We're going to take a break. These guys will keep on talking. We're going to take a break. When we come back, we'll talk about those $ 10 billion of loan guarantees.

[Commercial break]

KINSLEY: Welcome back to Crossfire. Those Middle East peace talks between Israel and its Arab neighbors resume next week in Washington. Here with a little preview of the action we've got the Israeli ambassador to the United States Zalman Shoval and the Egyptian ambassador Abdel Raouf El-Reedy, but I want to go back to Ambassador Shoval and talk about this question of the loan guarantees. The United States opposes the building of Jewish settlements in the occupied territories. It's our position that they are -- they harm the peace process. That may be right, that may be wrong, but it's our government's position. Regarding these $ 10 billion of loan guarantees that Israel would like, we say, we are absolutely thrilled that all these Russian Jews are coming to Israel, we want to help settle them but we are not prepared to finance a policy that we disagree with. We'll give you the guarantees-we're not giving money, it's just guarantees-but we won't do it if you insist on using the money to pursue a policy we disagree with. Now, why is that unreasonable?

AMB. SHOVAL: It's perfectly reasonable. We don't have any problem with that, we're not going to use one cent of those funds in the territories across the green line. We haven't used any of these funds before across the green line. As a matter of fact, 1.2 percent of the new immigrants have settled in the territories, that's all.

KINSLEY: Yes. That's a little disingenuous. The government announced a couple days ago that two-thirds of the housing -- government's housing budget for next year --

AMB. SHOVAL: Out of a total of how much?

KINSLEY: Well, I don't -- just a second, let me finish the question.

AMB. SHOVAL: OK.

KINSLEY: Two-thirds of the government's housing budget is going to go to building in the occupied territories. Now, a dollar is a dollar, a shekel is a shekel. You can move them around; if we give you this ability to raise this money, it enables you to spend other money on other things.

AMB. SHOVAL: Well, first of all what the government announced is 5000 houses, that's all, which is not a great deal because --

KINSLEY: How many people --

AMB. SHOVAL: Well, Israel -- KINSLEY: Four people in a family, that's 20,000; there's only 100,000 there now.

AMB. SHOVAL: Let's hope they're bigger families but Israel for instance has built this year alone 125,000 housing units in Israel itself, so 5000 is really not very significant, but I repeat. We are not going to use any of these funds and if anything can be worked out between us and the Israeli government to assure that in the future, we'll work it out.

NORTH: Mr. Ambassador, Mike likes to talk in terms of billions and point at Israel. My government forgave your government $ 7 billion in debt and yet since that time it appears to me and I think to many other Americans that the Egyptian government is moving further toward the radicals, people like -- embracing --

AMB. EL-REEDY: What do you mean?

NORTH: Well, the embrace for --

AMB. EL-REEDY: You're looking for -- your information, Mr. North, is very, very regrettable, that you are saying --

NORTH: Mr. Ambassador, I think we've all seen the picture of the embrace given by --

AMB. EL-REEDY: I'm sorry, I am sorry, Mr. North. I am sorry that you are not saying anything that is -- can be qualified as truthful. Egypt is a pillar of peace and moderation in that region and let me --

NORTH: How about the embrace for Qaddafi?

AMB. EL-REEDY: What do you mean? Libya is our neighbor and we --

NORTH: But that doesn't make them necessarily a good neighbor?

AMB. EL-REEDY: What are you supposed to do, go and fight --

AMB. SHOVAL: I think President Mubarak --

AMB. EL-REEDY: I did not interrupt you --

AMB. SHOVAL: -- met Mr. Arafat today.

AMB. EL-REEDY: Yes --

AMB. SHOVAL: Ah, Arafat is Saddam Hussein's ally.

AMB. EL-REEDY: Look --

NORTH: Please.

AMB. SHOVAL: I'm sorry.

AMB. EL-REEDY: Libya -- I did not interrupt you.

AMB. SHOVAL: You're right. AMB. EL-REEDY: Libya is our neighbor. What do you want us to do? To have -- to go and fight or try to find solutions to whatever problems. Let me just refer to one point about settlements because this idea -- the real issues. The question of settlements in the occupied territories, if there is any very serious problem, obstacle to peace, a grave violation of international law, it is this question.

NORTH: I would dispute your analysis.

AMB. EL-REEDY: And I'm very sorry to hear my dear friend Ambassador Shoval say that this is just a question of few people, few -- the reports which are being published today in the Washington Post, everywhere that there is a massive building of settlements and this is a serious -- a serious impediment to peace. The people in Palestine -- look, the Palestinians have lived for the last 2000 years in the whole of Palestine.

AMB. SHOVAL: There were no Palestinians even 200 years ago.

AMB. EL-REEDY: What do you mean? There have been Palestinians for the last 2000 years.

AMB. SHOVAL: When I was a child there were no Palestinians.

KINSLEY: All right.

AMB. EL-REEDY: I'm sorry that you are denying the existence of a whole people, Mr. Ambassador.

NORTH: Let me get back to the question I asked. I want to know about trust.

AMB. EL-REEDY: These settlements are --

NORTH: How does the embrace for Qaddafi build the trust that's necessary for this to work?

AMB. EL-REEDY: If you want to have trust, you should stop practices such as building settlements in the Palestinian land --

KINSLEY: OK.

AMB. EL-REEDY: You have to stop practices such as deportation of people.

KINSLEY: All right.

AMB. EL-REEDY: Relations between neighboring countries should be normal relations.

KINSLEY: Let me ask Ambassador Shoval something --

AMB. EL-REEDY: Should be normal relations --

AMB. SHOVAL: We are very happy with our relationship with Egypt.

KINSLEY: All right. That's very sweet --

NORTH: As a neighbor.

AMB. SHOVAL: As a neighbor.

KINSLEY: Now, suppose the Israeli government is prepared to offer the most extreme degree of autonomy to the Palestinians living in the occupied territories as part of some solution. Why should Palestinians, Palestinian Arabs, alone among all the peoples of the world have to settle for autonomy in someone else's country rather than citizenship in a country of their own?

AMB. SHOVAL: Because this is disputed land where historically two peoples have a claim. I'm even going as far as saying two people have two legitimate claims. The only way to cope with that is in some sort of interim solution. Now, the interim solution is to give the Palestinian minority in our country the way to run their own affairs in most walks of life but not in ways which would affect our security.

KINSLEY: But the net result is that all the Jews in the Middle East -- that's not true of course, there are Jews in the Arab countries who don't have -- have it very well, but the Jews in Israel will all have citizenship, not autonomy but citizenship, whereas the Palestinians would be left with something short of citizenship and that does not exist anywhere else in the world.

AMB. SHOVAL: Well, it exists in many parts of the world. Look at the Kurds and look at other minorities.

KINSLEY: Well, those aren't democracies.

AMB. SHOVAL: That's right.

KINSLEY: You're not going to compare yourselves to the Iraqis.

AMB. SHOVAL: That's right.

NORTH: We're going to give the Ambassador the last word on this one this time because we have to take a break and when we come back we'll talk about some of the worst case scenarios if the Middle East peace process doesn't succeed.

[Commercial break]

NORTH: Can we anticipate that if this process breaks down, if it doesn't work-what started in Madrid is a noble experiment in peace-if it doesn't work are we going to see a resurgence of the kind of radical terrorism that we -- besieged us all in the eighties? Are we going to see a growth of what we're already seeing in Algeria with the Islamic radical fundamentalists?

AMB. EL-REEDY: President Nixon said in his new book and yesterday and he is warning exactly on this point and he is saying this is the right moment to make peace and if you do not achieve peace at this juncture, you are going to have a resurgence of extremism and fundamentalism on both sides, on both sides.

NORTH: How about you?

AMB. SHOVAL: Let's be optimistic. The Palestinians have wasted 40 years with regard to peace. We have a chance now, we are waiting for them. Let's talk secret, concrete, real talks and achieve peace.

KINSLEY: I'm sorry --

AMB. EL-REEDY: And give them justice and fairness.

KINSLEY: I'm sorry you said secret 'cause I wanted to ask you and I'm going to ask you anyway, what practically can we expect in the new few days? First of all, can we expect the Israelis and the Palestinians, Jordanians to settle this question of who sits where and at least go into the same room?

AMB. SHOVAL: I certainly hope so. If the Palestinians get over these procedurals we can get down to substance. We were prepared to get down to substance the last time. They refused. I hope they have changed their minds. If we can do that, we will make progress this time.

AMB. EL-REEDY: The Palestinians are most eager, more than anybody else - -

AMB. SHOVAL: They should be.

AMB. EL-REEDY: -- to change their status from people under foreign occupation --

AMB. SHOVAL: They should be.

AMB. EL-REEDY: -- into people who have their own rights and they do not want to waste time. I know their position very well.

AMB. SHOVAL: Well, they came late.

AMB. EL-REEDY: They are very eager. These have been procedural problems which maybe you have one point, they have their own point, very important for them, but what they are eager about is to go on with the peace and to change their conditions from a people under foreign occupation into a people who have their own rights in their own land.

AMB. SHOVAL: Well, we offer them peace. We offer them home rule.

AMB. EL-REEDY: OK.

AMB. SHOVAL: We offer them autonomy.

KINSLEY: All right.

AMB. EL-REEDY: Offer them --

KINSLEY: You guys --

AMB. EL-REEDY: -- also their land --

AMB. SHOVAL: Let's come to the table --

KINSLEY: You guys, go -- you can settle it after the show. We'll be pleased to announce the results. Thank you, Ambassador Shoval, Ambassador El-Reedy.

AMB. EL-REEDY: Thank you.

KINSLEY: Lieutenant Colonel North and I will negotiate peace in the Middle East and elsewhere in just a moment.

[Commercial break]

NORTH: Mike, you and I probably wouldn't agree on much but I think we're one on this issue that what's been started in the Middle East is a noble experiment in trying to achieve something that's eluded the world for 50 years. We have a chance --

KINSLEY: Sounds safe enough.

NORTH: We have a chance now and hopefully it's not just someone's effort to give Jim Baker the Nobel Prize for peace. I think one of the points made here this evening that if -- this may well be the last chance and if it doesn't work now we face rising Islamic fundamentalism, the growth of terrorism and the very real possibility of the PRC and the North Koreans helping arm people with nukes.

KINSLEY: Well, that's fine. The question is then, are you prepared to see the United States, our country, not merely be a middle man but put pressure on both sides to push them along because that's the only way I think you're going to get real movement in these talks.

NORTH: One of the best middle men was sitting here. The only government in the region that's trusted by both sides, the Egyptians.

KINSLEY: A free ad for the Egyptian ambassador. From the left, I'm Mike Kinsley. Good night for Crossfire.

NORTH: And from the right, I'm Oliver North. Join us again tomorrow for another edition of Crossfire.