The following editorial appears on Bloomberg View:
When Egyptian police opened fire on protesters in Cairo over the weekend, they ended not only scores of lives but also any chance of a peaceful resolution to Egypt's burgeoning civil war. They also further exposed the Obama administration's hypocritical policy of maintaining aid to the regime, despite U.S. law requiring a suspension.
The day before the killings, the administration had declared that it would circumvent the law, which mandates a cutoff of aid to any country whose legitimately elected leader is overthrown in a military coup.
The United States would not determine whether the Egyptian military's coup against legitimately elected President Mohammed Morsi was what it was. "Legal obligations" were important, State Department spokeswoman Jen Psaki said. It's just that unspecified "national security interests" were more important.
Left unmentioned were the financial interests at stake: If the United States severs Egypt's aid, it will be on the hook for billions of dollars in U.S. military contracts meant for Egypt. And if Egyptian aid is not renewed, U.S. military contractors will lose an important client.
This situation emerges from Egypt's privileged position among U.S. aid recipients. Not only is Egypt one of the biggest recipients of U.S. aid, receiving $1.55 billion annually, $1.3 billion of which goes to the military.
What's more, Egypt and Israel alone are allowed to use something called cash-flow financing to acquire defense goods and services from the U.S. This enables them to make contracts for the future based on expected aid. Egypt pays the U.S. for the goods out of its aid, and the U.S. pays the contractors.
The U.S. won't give an estimate for the total value of outstanding contracts. A $2.5 billion deal with Lockheed Martin Corp. in 2010, however, is representative. The company agreed to deliver 20 F-16 fighter jets to Egypt by December 2014. Through June 30, it had delivered 14. Through April, the U.S. has committed $797 million toward the contract, leaving it liable for the remaining $1.7 billion.
The Obama administration announced last week that the delivery of the next four F-16s would be delayed. Then came the weekend of violence, with Egyptian authorities killing at least 74 pro-Morsi protesters some of whom, according to a report by Human Rights Watch, were shot from above, in the head and chest. This suggests the gunmen aimed to kill, rather than to defend themselves or disperse the crowd.
Under such circumstances, the U.S. has no choice but to suspend its aid to Egypt. Doing so would be extraordinarily wasteful, as the U.S. would still have to pay the military contractors.
And if the Egyptian government continues to behave in a way that makes the resumption of aid impossible, U.S. military contractors could lose Egypt as a client.
The second concern shouldn't be a driving force of U.S. foreign policy. As for the first, it argues for eliminating Egypt's statutory access to cash-flow financing, which would require the administration to work with Congress.
At this point in its history, Egypt is neither a stable country nor a reliable ally. What the U.S. needs is both flexibility and strength in its dealings with Egypt: that is, the ability to suspend aid without worrying about contractual obligations and the determination to use that ability to encourage peaceful change.