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U.S. faces substantial losses if Egypt aid halted: official

Egyptian soldiers keep guard on the border between Egypt and the southern Gaza Strip September 3, 2013. REUTERS/Ibraheem Abu Mustafa
Egyptian soldiers keep guard on the border between Egypt and the southern Gaza Strip September 3, 2013. REUTERS/Ibraheem Abu Mustafa

WASHINGTON (Reuters) - The U.S. government faces billions of dollars in potential costs if it decides to cancel foreign military aid to Egypt, a senior Pentagon official told Reuters on Wednesday.

Richard Genaille, deputy director of the Pentagon's Defense Security Cooperation Agency, said he hoped the Obama administration reached a decision soon on whether to continue $1.23 billion in U.S. military assistance to Egypt, given the large number of weapons shipments in the pipeline.

"We're kind of antsy about that," Genaille said after a speech at the ComDef industry conference in Washington. "There's a whole bunch of contracts out there. The bills keep coming in and we've got to be able to pay them somehow otherwise we go in default."

Washington is reviewing the U.S. military aid to Egypt and an additional $241 million in economic aid after the country's military ousted the Muslim Brotherhood-backed government on July 3 and then cracked down on protesters last month.

Washington has already halted deliveries of four F-16 fighters built by Lockheed Martin Corp, and must decide soon on several other large weapons shipments, according to U.S. government officials. Some smaller items covered by the foreign military assistance have been allowed to proceed.

Funding for the weapons sales must be finalized or "obligated" by September 30, when the U.S. government's 2013 fiscal year ends, or the funds will revert to the U.S. Treasury, officials say.

"We're kind of hoping that sometime pretty soon they'll make a decision one way or another - either we terminate or they actually give us some more of the Egyptian (foreign military funding) so we can pay the bills," Genaille said.

He said the administration was trying to sort through the potential costs associated with terminating contracts, but the amount would be "substantial - in the billions."

Other U.S. officials have said potential costs of ending the contracts can include penalty payments the U.S. government would be liable to pay to the defense contractors for cancelling them as well as the costs associated with winding down the programs.

When the Obama administration decided last year to continue military aid to Egypt despite its failure to meet pro-democracy goals, U.S. officials cited as one of their reasons the fact that the termination costs could have exceeded $2 billion.

The U.S. government's foreign military sales contracts with Egypt include a clause that requires the Egyptian government to accept responsibility for the cost of those weapons even if it does not receive U.S. foreign military funding.

Despite that, analysts and former senior officials have said the U.S. government could face $2 billion to $3 billion in bills if it terminates aid to Egypt completely.

(Reporting by Andrea Shalal-Esa; additional reporting by Arshad Mohammed; editing by Andrew Hay)

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