Bloomberg News

Egypt Military Fund Cutoff Weighed by U.S. Over Prosecution

February 28, 2012

(Updates with Egypt dollar bonds falling in fifth paragraph.)

Feb. 23 (Bloomberg) -- The Obama administration may be compelled to block $1.3 billion in military aid to Egypt if the Mideast nation prosecutes U.S. workers with non-governmental organizations, a State Department official said.

“We are looking at that very seriously,” Andrew Shapiro, the assistant secretary of state for political-military affairs, said yesterday in an interview in Bloomberg’s Washington office. “No decisions have been made. Our hope is the NGO crisis is resolved. That’s the focus of our diplomacy.”

A criminal trial is scheduled to begin Feb. 26 for 43 workers, including a group of Americans, accused of illegally accepting payments from abroad. Among those charged are workers in Cairo for the National Democratic Institute and the International Republican Institute, organizations allied with the U.S. Democratic and Republican parties. Sam LaHood, the son of Transportation Secretary Ray LaHood, is among them.

“We don’t think they should be put on trial,” Shapiro said. “We think they should be allowed to leave.”

Egypt’s 2020 dollar bonds fell, pushing the yield up the most in a week, after the interview. The yield on the nation’s 5.75 percent notes advanced four basis points, or 0.04 of a percentage point, to 7.28 percent at 3:26 p.m. in Cairo, according to prices compiled by Bloomberg.

General Martin Dempsey, chairman of the Joint Chiefs of Staff, has said cutting off the military aid would be a mistake while also urging his counterparts in Egypt’s ruling military to seek a halt to the prosecution.

General Dynamics, Lockheed

U.S. defense contractors such as General Dynamics Corp. and Lockheed Martin Corp. benefit from weapons sales to Egypt financed through the aid.

Egypt views the U.S. assistance as linked to its participation in the 1978 Camp David Accords with Israel.

U.S. representatives, including a delegation led by Senator John McCain, an Arizona Republican, have met with Egyptian officials to urge that a trial be averted. Egypt’s Foreign Minister Mohamed Amr said on Feb. 21 that while the government has no influence on the judiciary, he hoped for a speedy resolution of the case.

Blocking aid to Egypt that is pending for fiscal 2012 “would be a significant decision,” Shapiro said. “The NGO issue has to be resolved. The status quo is unsustainable.”

M1A1 Tanks

A cutoff would interrupt funding of a 24-year-old agreement by General Dynamics with Egypt to produce M1A1 tanks jointly outside Cairo, according to Peter Keating, a spokesman for the Falls Church, Virginia-based company. Honeywell International Inc. and Allison Transmission Inc. are subcontractors.

Lockheed of Bethesda, Maryland, which also benefits from the funding, is manufacturing 20 F-16 fighters for Egypt with delivery scheduled later this year, according to Laura Sibert, a company spokeswoman.

“Certainly, U.S. companies would take a hit,” Shapiro said. “Our policy has to be consistent with our values and certain times we pay an economic price for that.”

Egypt has received about $1.3 billion annually since 1979 in Foreign Military Financing, which must be spent with U.S. companies. The aid is used for new weapons, upgrades to existing equipment and follow-on maintenance and support contracts.

The non-partisan Congressional Research Service said in a January 2011 report that about 30 percent of the money is spent on new weapons.

Certification Required

Under legislation passed by Congress last year, the State Department must certify that Egypt’s government “is supporting the transition to civilian government including holding free and fair elections” and “implementing policies to protect freedom of expression, association and religion and due process of law.”

The financing “has served U.S. interests for a number of years, and Egypt remains an important partner,” Shapiro said. Still, “If we are not prepared to certify or waive the requirement, the aid cannot flow.”

No contracts dependent on the funding have been canceled yet, he said.

“Right now there is still enough in the pipeline that there’s been no cutoff in existing contracts,” he said. “At a certain time it would impact the ability to do those contracts.”

--With assistance from Viola Gienger in Washington and Ahmed A Namatalla in Cairo. Editor:

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net


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