(Reuters) – Standard & Poor’s downgraded the credit ratings of nine euro- zone countries, stripping France and Austria of their coveted triple-A status but not EU paymaster Germany, in a Black Friday the 13th for the troubled single currency area.

“Today’s rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone,” the U.S.-based ratings agency said in a statement.

In a potentially more ominous setback, negotiations on a debt swap by private creditors seen as crucial to avert a Greek default that would rock Europe and the world economy broke up without agreement in Athens, although officials said more talks are likely next week.

If Greece cannot persuade banks and insurers to accept voluntary losses on their bond holdings, a second international rescue package for the euro zone’s most heavily indebted state will unravel, raising the prospect of bankruptcy in late March, when it has to redeem 14.4 billion euros in maturing debt.

S&P cut the ratings of Italy, Spain, Portugal and Cyprus by two notches and the standings of France, Austria, Malta, Slovakia and Slovenia by one notch each.

The move puts highly indebted Italy on the same BBB+ level as Kazakhstan and pushes Portugal into junk status.

Read more at Reuters.

The Germans, understandably, wanted those who have loaned Greece money (primarily, the European banks) to take a loss of about half of the value of their loans in order to ease the extremis in which Greece finds herself.  France, whose banks are holding a lot of Greece’s debt, preferred to rely more heavily on a pumped up bailout fund to ease the burden on Athens.  Given that the German taxpayer is certain to be the biggest funder of the proposed additional bailout, it is not hard to understand the rising tensions on the continent.

One can’t blame the banks for their reluctance to dance at this party.  Based on commitments the EU countries made, to keep their debt to no more than 60% of GDP and their deficits to no more than 3% over the prior year, Europe’s banks became major financiers of the new Euro countries.  But many of the European countries that were financially irresponsible prior to the advent of the Euro had no intention of changing their ways subsequent to exchanging their old currencies for the new Euro.  Greece flat out misrepresented its financial condition when it applied to become a member of the Euro Zone.

As it became apparent that many European countries had little or no hope of servicing their debt which, in some cases, was running over 100% of the agreed upon debt-to-GDP limits, the banks, which had bellied up to the bar to buy the debt of countries such as Greece, Spain, Italy, Ireland, Portugal, etc. were asked to write down (or forgive) a substantial portion of what was owed to them.  Just last summer, the banks agreed to a 21% haircut.  Now, they have been forced to make that a 50% haircut. They are not happy.

The banks are also being required to raise well over $100 billion over the next six months to shore up their balance sheets with ”safe assets” equal to 9 percent of their total capital. This will, it is argued, assure investors of the banks’ financial health (good luck). The great concern, of course, is that no one will want to hold or buy the debt of the gaggle of other European countries with debt way over the limits that were set as the basis of the Euro Zone in the first place.  The situation is somewhat analogous to private companies ignoring their loan covenants.  Over half of the 27 European Union countries already exceed the 60% debt-to-equity ratio limitation.  Last year the average debt-to-GDP ratio of the EU countries was running well over 80% and the average of the 17 Euro Zone countries now exceed 85%.

The political leaders of the EU countries are determined to save the Euro, although deep differences exist over how to accomplish what is becoming an increasingly difficult task.  German Chancellor, Angela Merkel has succeeded in prodding her country’s lawmakers into approving a plan to more than double the existing $610 million bailout fund to $1.4 trillion. Given the growing reluctance of the German taxpayer to continue underwriting the lion’s share of these gargantuan bailouts, Merkel rates high marks for political courage (perhaps she wants to prolong the day of reckoning so that Euro doesn’t collapse on her watch).  The Europeans have jumped through hoops to facilitate a soft landing for a Greek default (that is, after all, what a 50% haircut amounts to) out of a well-founded fear that credit availability for the rest of Europe’s overly indebted countries could either disappear or come at very high cost.

The risk of contagion is very real.  If concern over the solvency of the weaker countries such as Greece and Portugal persists, that anxiety can easily, even predictably, spill over into larger economies such as Spain and Italy. At that point the solvency of the entire European banking system, which has huge exposure to these economies, could be called into question.  Banks might suddenly refuse to lend to one another out of fear that their banking counterpart may have solvency problems. Remember Lehman Brothers?

The deal to save the Euro, if not the EU itself, includes several components including the restructuring of Greek debt, the infusion of fresh capital into major banks on the continent and the expansion of the existing bailout fund.  This agreement will, it is hoped, help avoid panic in Italy and other Euro countries.  Some of the troubled countries, such as Spain, Portugal and Ireland have made progress to shore up their fiscal affairs, but Italy remains particularly worrisome because of its huge debt-to-GDP ratio (124%) and its dysfunctional government (sound familiar?).  Thus far, Italy has failed to produce the budget cuts promised by Prime Minister Berlusconi. Given Italy’s huge debt, now over $2.65 trillion, his colleagues in the EU want more than promises or letters of intent promising to do more.

Sadly, this agreement to tamp down the jitters over the sorry state of Greek finances will, at best, convert Greece from an utterly lost cause, to merely a basket case.  Greece was on course to have, by the end of next year, a debt-to-GDP ratio of 272%, not only unsustainable, but also politically unsurviveable.  The agreement reached in Brussels, including the 50% haircut banks will take, will reduce, by the end of 2020, Greek debt to 120% of GDP.  In other words, from deadly to merely terrible.

As a recent of study of economic history by Reinhardt and Rogoff shows, economies cease growing and begin to contract at debt-to-GDP ratios in excess of 90% — and that is exactly the tipping point to which the United States seems unalterably headed. While public debt in the United States has increased by over $500 billion each year since fiscal year 2003, increases during the Obama Administration have been enormous with increases of $1 trillion in FY2008, $1.9 trillion in FY2009, $1.7 trillion in FY 2010 and $1.3 trillion during the 2011 fiscal year that just ended.  As of last week, the gross debt of the United States was $14.9 trillion, of which the public held $10.2 trillion and $4.74 trillion was intragovernmental holdings.

As we write this essay, the US Treasury is auctioning (selling) debt in transactions that settle, ironically, on October 31 (Halloween), which will drive outstanding US public debt to an amount larger than the entire American economy of over $15.0 trillion. “Not a problem,” many on the left say.  ”We’re not like the EU countries that can’t print their own currencies. We own the dollar; we can produce all we need to service our debt. Spend on.”  And that is just what we are doing.  We can continue to collect taxes from only about 50% of tax filers to extract more from our highest earners, and shut our eyes to the long-term consequences of copying the collapsing eurozone by continuing to spend, tax and incur debt that jeopardizes economic growth.  If we do so, we are inviting a fate no different than theirs.

My father “earned” his way out of Cuba by working essentially as a slave on the sugar cane fields for 2 years, where more than 25% of the people died within a year from malaria, as a punishment for asking for an exit visa.  We went back to Spain with the clothes on our backs (I was a toddler).  When Franco died, many Spaniards (my whole family is from Spain, my parents were in Cuba for only a few years), figured Socialism would come in, so many (like us) left, running from socialism to a country where we knew no one, had no jobs, and didn’t understand the culture or the language.  Socialism always does that — creates an incentive for the bright, the educated, the entrepreneurs and the wealthy to leave, leaving the country with what?  So we came to the U.S.

I learned English at 14, worked hard to get out of the ghetto, got into Cornell with a special language waiver, managed to get a Cornell engineering degree, then joined the Navy. Part of the reason I served was that I felt like I owed the country something for taking us in. I got hurt in Bosnia,came home, worked hard to establish a business, and now I’ve left my country, because I can’t take the Socialist slant anymore, and I am so tired of the regulations that make it almost impossible to do business in the U.S.  When I closed my home theatre installation business, I was not an engineer; I was a paper-filler-outer.  I have ZERO incentive to start my business in the USA between the taxes and the regulations.  The last straw was this summer; there are now over 6,000 lamps I can no longer use in jobs.  If I do, there is a fine of $5000 PER LAMP all for some hoax called Global Warming.  By the way, the new “better” lamps are from 4x to 10x costlier, and the “environment-killing” lamps are being used in every other non-EU country.

You need to understand Domingo as I did.  We were on the same dorm floor freshman year.  All he did was study.  He busted his ass, and every other day he talked about how grateful he was to the U.S.  He always intended to join the Navy, despite us (at the time, foolish liberals) trying to talk him out of it.  For this man to do all he has done, then leave of his own free will?  Wow.

Now, he lives in Costa Rica.  Here’s the letter he sent (edited for length):

1 October, 2011; Pilas de Alajuela, Costa Rica

So I decided to take a walk today. This was a Saturday afternoon, and people were doing their business like any other day. Dogs ran around — no collars, no tags, yet no one seemed to care or be bothered.  I saw homes of the poor, the rich and the in-between, all mixed up, on the same street as the church, the schools, the bars, the restaurants and the convenience stores. Many people were dressed in clothes that would surely make the Goodwill rack in the US.  Yet, the people were clean, tidy, polite, groomed, and well-dressed.  No flip-flops or torn jeans in church or school, no ragged clothes or shirts with profane slogans — even the people in the bus stops were well-dressed and smelled of perfume and cologne.

The roads are shared by horses, pedestrians, bicycles, motorcycles, ATVs, cars, trucks, buses and other vehicles. Somehow hundreds of vehicles taking treacherous turns at steep angles manage to share the road with no incident. There are no medians, no sidewalks, no emergency lanes, no jersey borders, no reflective gizmos on the road, not even a yellow line down the middle. The roads are barely wide enough to allow two cars through, yet buses and trucks manage the turns all day. I even saw an amazingly adept chicken cross the road. In six hours, seeing dozens of intersections, I saw zero STOP signs, one blinking red signal light, no ridiculous “slippery when wet” or “dangerous curves” signs, no highly paid DOT workers standing around with signs that say “SLOW” and of course, no highway marker signs or street name signs. Somehow, 5 million people manage to navigate a country a little smaller than West Virginia with barely a touch from the government. I did not see a single police car all day. We in America are so accustomed to having government in every aspect of our lives and so prevalent in our society, we don’t even notice the intrusion anymore.

There were people cleaning their cars, painting fences and mixing concrete for repairs to their homes. Some had very little, but what they had they kept with pride. I saw almost no graffiti, even in the city center. Most of the homes had been built or expanded by the homeowners. I felt the pride and the dignity of the people everywhere. There were people in their tidy uniforms performing all types of duties. You see beautiful girls standing in the aisles of the supermarket asking you to try new products. There were men working for small tips at the parking lots, charging you a few colones (a quarter) to clear the traffic while you park, and to watch your car while you spend time inside the store. People were doing what they could, working instead of begging.

I met an old impoverished lady who told me through her crooked smile and missing teeth to “travel with God”, and she asked whether I was interested in a live chicken. She raises chickens, then sells eggs and chickens (live or dead) to anyone walking by. Some of the eggs still had straw on them. I am reasonably sure she does not read mountains of regulations regarding raising and selling chicken products, nor does she have a myriad of health inspections, yet she manages to have an apparently loyal clientele. There was an actual line of people waiting for her to bring the fresh eggs. She works to get by and she is full of pride, flags of Costa Rica painted on her deteriorating porch.

Thinking again of lack of regulation, I saw two veterinarians who work from their home. Half the house is a vet center, the other half is a residence. I walked past an orthodontist practicing from her home, as well as mechanics, car painters, a body shop, convenience stores, a butcher, and a vegetable market. There was an older lady who has quite a following for her meat patties, handmade and ready to eat, right next to the bus stop. And all this is done from their homes, without mountains of regulations or government agencies to get in the way.

Did you know that they cook with SALT here (yikes), PORK FAT (double yikes), real SUGAR (oh Lord), whole milk (fatty, fatty) and pretty much only drink water when mixed with coffee. Yet, the lack of obese people everywhere is amazing. Somehow, I don’t think it’s the salt, the meat, the pork fat or the sugar.

It is hard for me to explain what freedom feels like, but this place has it. These people are proud of what they are, who they are and what they’ve accomplished for themselves, what little or much it may be. This is all visible in the way they comport themselves with dignity. Though not highly educated, they don’t need thousands of pages of rules to tell them how to run a business, what foods to eat, where the bathroom needs to be, how large the door needs to be, how to establish bus transportation, or even how to drive up and down a mountain.

When people receive welfare, free food, free housing, free medicine, free babies, free education – now the US government has a program to provide free cell phones to people – people stop having drive and determination. People stop being proud in what they are and what they’ve done; productivity and creativity stop. Why bother creating when everything comes to you with no effort from a magical government fairy?

The entitlement mentality also makes you less caring about others. Why worry about them, since they can get everything for free just as well as you can?  These people have not been ruined in that fashion, and it is so refreshing to breathe in the freedom.  In fact, it is so foreign to us that have lived in highly regulated societies that we have lost the concept that people can, and do, fend for themselves. The people here in Costa Rica know that every day is a challenge and every day is a gift, they respect that double-edged sword, respect the others around them and strive to do something that will earn and sustain their personal pride.

By the way, there are no unions here.  Malpractice insurance does not exist.  And if you bring a ridiculous case to court, you lose your law license.

Are there downsides?  Sure.

Super-low income taxes (11% corporate, ZERO percent personals).

Flat consumption tax on everything, no exceptions…but no IRS, either.

Very little government, which means few cops and firemen.

Few cops means  the Second Amendment is alive and real here!

Few firemen, but in earthquake country, all the houses here are built of solid concrete.

There is no military, so no defense.

Bumpy roads, since the gas tax is so low.  Then again, America has potholes, too.

Court system is slow, but so is ours, and we have tons of taxes.

Crappy jails, but then again, jail should suck.

No road signs, but GPS is cheap.

No sidewalks, but no one cares.

It’s hard to point to truly “bad” things about Costa Rica.  Unless you think it’s “bad” that it doesn’t have these things:

No welfare

No unemployment compensation

No Social Security or Disability

No food stamps

No free housing

No free anything

Poor people go to school in church schools, which run off donations, and people help each other here.

I’d close with some kind of profound comment, but why spoil it?

The European sovereign debt crisis did not start 18 months ago when Greek borrowing costs began rising from 3% to the current 75%. The crisis began in 2009 when German politicians passed a constitutional balanced-budget “Golden Rule” at the height of the global credit crisis. The Golden Rule prohibits German politicians from passing a budget with a deficit of more than 0.35% of Gross Domestic Product (GDP). This was a radical departure from the unenforceable “Stability and Growth Pact” of the seventeen nation euro that limits deficits to 3% of budgets.

For a monetary union to be sustainable, it must be operated on the basis of ‘symmetrical obligations’ among the members. Germany’s decision to cut-off spending of its trade surpluses to finance the PIGS trade deficits has created a deflationary spiral in Europe. Over the last two years there have been numerous incremental European bail-out programs aimed at stopping the Greek debt crisis from spreading to the other PIGS. Each successive program forced deeper “reform” cuts to PIGS spending. “No reforms, no bond purchases” has been the message of the German controlled European Central Bank (ECB) and the German controlled European Financial Stability Fund (EFSF).

Following periods of short term relief, each program failed.

Every year there are a numerous countries that get into financial trouble. The usual answer is to devalue their currency to become more competitive. This creates lots of pain for holders of country’s debt; but quickly the nation becomes a “cheap” tourist venue and eventually businesses start relocating to the country to enjoy “cheap” labor. The PIGS have lost this option. It still costs virtually the same amount to stay in a nice hotel and enjoy a cold beer in Athens as it does in Berlin. Without the ability to devalue their currencies; the PIGS are being forced to increase “austerity” reductions in government spending to satisfy the next ECB or EFSF bail-out.

The introduction of the euro currency was sold to the citizens of the PIGS as an opportunity for economic “convergence”; whereby Portugal, Italy, Greece, and Spain would benefit from learning how to be as competitive as Germany. But in the nine years since the euro launch the PIGS have suffered 30% losses in competitiveness to their northern neighbors. This has destroyed hundreds of thousands of private sector jobs. The increasing austerity requirements of the bail-outs in Greece have resulted in an addition 20% cut in public sector jobs.

With job shrinkage accelerating in the PIGS; it is only a matter of time before rising protester violence forces these nations to quit the euro and bring back the Portuguese “escudo”; Italian “lira”; Greek “drachma”; and Spanish “peseta”. In the perfect world of an orderly devaluation, the losses to bondholders and banks would be approximately $3.5 trillion and make 70% of European banks insolvent. But the history regarding devaluations has been one of chaos and violence. In a disorderly devaluation the losses will run closer to $6 trillion and 85% of European banks will be insolvent.

The euro was never sustainable concept and the German Golden Rule has now accelerated the destruction of the Portuguese, Italian, Greek, and Spanish economies. There is a lesson for Americans to learn from this European wipe-out. Those who live on borrowed money; will eventually die by borrowed money!

Feel free to forward this Op Ed and follow our Blog at www.chrissstreetandcompany.com
On October 15th Chriss Street will publish his latest book: “The Third Way”

From our president we will hear a call to community service and a plea to find volunteer opportunities in our neighborhoods, because, you know… the real message behind 9/11 is to plant a garden at the local welfare office.

What we won’t hear enough of this momentous day is the truth about 9/11. The truth about what happened that day. The truth about why it happened.

The truth is that on September 11, 2001 war was declared on the United States of America. Our ideological opponents on the left (as well as some of the more troubling supporters of Rep. Ron Paul) will tell you that it 9/11 wasn’t an act of war because the perpetrators were not acting on behalf of any nation. As if in some way the fact that our attackers didn’t have a flag on their sleeves while demolishing our financial and military headquarters some how re-defines the act as merely a “crime”.

The liberals and libertarians mired in their denial of the reality of the world we live in are dangerous and must be answered with vigor. 9/11 was not a “criminal act”. And, despite what President Obama might say, we are not in a war against Al Qaeda. By narrowing our focus and pretending that we must only respond against those whose fingerprints can be found on the 9/11 attack is an invitation to our enemies around the world to wage war on us through proxies like Al Qaeda.  A Commander-in-Chief Ron Paul, with his pathetic call for Letters of Marque and Reprisal, would allow enemies like North Korea, Iran and Venezuela to send hundreds of organizations like Al Qaeda toward our skyscrapers all under the protective banner of “rogue criminal act”.

9/11 was war. War was declared on the United States of America, and very soon after, on many of our allies, Great Britain Australia and Spain. At the time we had a leader who recognized the fact that we were at war, whether we liked it or not. And he struck back. Effectively and with gusto. The Afghan government, which had aided and abetted our attackers, fell within months.

By not being obsessed with one man, Osama bin Laden, and instead focusing his aim at nations that were supporting, funding or giving refuge to terrorist groups, our President effectively and wisely declared that our world cannot be at peace until the day comes when nations will not risk their own destruction by playing footsie with madmen who do their dirty work for them.

Three years ago our country dozed off.  We thought that if we elected a man who talked nice to our enemies (take a look at what candidate Obama said about unconditional talks with North Korea, Iran and Venezuela) and pronounced “Pahk-eee-stahn” like a local we’d somehow steer clear of terrorist attacks.  The fact is the world is much more dangerous now than it was three years ago.  We are less popular in the Arab world than before we hired citizen of the world Obama to be our Commander-in-Chief.

And as President Obama implores Americans to heed the call of 9/11 and volunteer at a soup kitchen, our enemies are plotting their next devastating attack on us.

9/11 was a declaration of war.  We answered.  Then we turned our back.  What will happen next?

In case you missed the WaPo piece, the man in charge of China’s model train set:

“is ruined, and his high-speed rail project is in trouble. … his ministry has run up $271 billion in debt — roughly five times the level that bankrupted General Motors. But ticket sales can’t cover debt service that will total $27.7 billion in 2011 alone. Safety concerns also are cropping up.

Faced with a financial and public relations disaster, China put the brakes on Liu’s program. On April 13, the government cut bullet-train speeds 30 mph to improve safety, energy efficiency and affordability. The Railway Ministry’s tangled finances are being audited. Construction plans, too, are being reviewed.

Liu’s legacy, in short, is a system that could drain China’s economic resources for years. So much for the grand project that Thomas Friedman of the New York Times likened to a “moon shot” and that President Obama held up as a model for the United States.”

In short, it’s an awful lot like Spain’s wind- and solar program President Obama also longs to impose here.

That’s our Obama administration for you – ever-enamored of that faculty lounge worldview that it is the rest of the world, or at least its more statist quarters, that has so much to teach us, on everything — swooning  over disasters that are hard to see from the faculty lounge, when wearing ideological blinders.

Pardon me for thinking it’s wonderful to see the facade cascade down upon these folks who are just too reminiscent, in their fawning over glorious people’s projects, of the cast in P.J. O’Rourke’s essay “Ship of Fools” chronicling his cruise down the Volga and otherwise eyeballing the decrepit Soviet Union, Lefties ooohing and aahing “Did you know there’s no unemployment? The Soviet constitution guarantees everyone a job”, “‘Isn’t it wonderful’, she said, presenting Red Square as if she’d just knitted it”, “And where do they get all the water?” while passing through a canal.

Standard water cooler talk at the administration’s agi-tank, Center for American Progress. And, as Kreutzer writes:

“Bullet-train cheerleaders at the Center for American Progress also seem swayed by [the argument embraced by Chinese leaders of] bigness and national prestige: ‘Today, it is China that is leading the world in a key next-generation transportation technology: high-speed rail. … China already boasts a rail network that, including both standard and high-speed rail, is more than 53,000 miles long.’

[WaPo's Charles] Lane had additional insight regarding the process that led to such a hugely costly mistake: “Rather than demonstrating the advantages of centrally planned long-term investment, as its foreign admirers sometimes suggested, China’s bullet-train experience shows what can go wrong when an unelected elite, influenced by corrupt opportunists, gives orders that all must follow—without the robust public discussion we would have in the states.”

How much better the process would be with honest opportunists is not clear…”

Heh. On a completely unrelated note (I assure you), an eagle-eyed colleague at the Institute for Energy Research passed something along he spotted in an apologist E&E News item, “DOE loan chief pleads case for Solyndra credit line” (I think we now know how the Solyndra financiers in our government would fare in China).

It turns out you should have no fear that a place handing out taxpayer money isn’t sufficiently scrupulous, diligent and tightly run.

The Department of Energy’s ‘green’ Loan Guarantee Program head actually tells us that they’ve gone from 14 employees in 2009, when they handed out $30 billion in loan guarantees, to…’more than 170 today’.

That’s ‘more than’ a 1,114% increase in DOE loan office employment in 2 years. Can’t wait to see what other Solyndras are out there we’ll learn about! Hello, Beijing?

Last year, here at BigGovernment.com I warned how the Obama Administration was making a Greek bailout more likely by agreeing in advance that U.S. taxpayers would help foot the bill. Later, the IMF set up a $356 billion bailout fund for European governments with the consent of the Obama Administration– even though the fund will likely cost U.S. taxpayers between $50-100 billion and possibly more – all without a Congressional vote or consultation.

On April 29, 2010, Rep. Mike Pence (R-IN) and I wrote a letter to Treasury Secretary Tim Geithner warning of the dangers of U.S. participation in a Greek bailout. “The Obama Administration needs to understand that bailing out Greece will not solve Greece’s problems,” I said at the time. “It will only create a moral hazard that gets America more involved in the gathering storm of European bailouts.” That storm has since consumed Ireland and Portugal and others may be on the way.

At a time when the U.S. government is borrowing $5 billion every day on top of a $14 trillion national debt, does it really make sense for us to borrow even more money (much of it from China) to help bailout Europe? After all, the European crisis was caused by too much spending and borrowing, and that crisis will not be solved by more spending and borrowing.

While the IMF refuses to provide a reliable number, we estimate that America’s contribution to a Portuguese bailout is equal to writing a check worth $600 for every man and woman in Portugal. This largesse makes it more likely that larger counties – particularly, Spain and Italy – will be standing in line for U.S. tax dollars tomorrow. That is unacceptable. We cannot take the “too big to fail” philosophy to a global level. The only thing “too big to fail’ is America itself.