The only remaining question is whether the common interest of states in reining in the financial sector will overcome their separate interests of backing their own “national champions.”

Perhaps mercifully, Argentinian President Cristina Kirchner missed the World Cup final because of illness and her grandson’s first birthday, while Angela Merkel was there to see Germany seal the win. In the aftermath of football’s disappointment and euphoria, both leaders have some tricky problems to deal with regarding international finance and their relations with the United States.

Kirchner’s problems are the most pressing. On June 16, the U.S. Supreme Court declined to hear an appeal from a decision of the 2nd U.S. Circuit Court of Appeals ordering Argentina to pay in full the claims of a group of creditors, who hold roughly $1 billion in Argentine bonds, about 1 percent of the country’s outstanding debt. The investors, led by New York billionaire Paul Singer and politically well-connected in Washington, acquired the tag of ‘vultures’ by buying up the bonds at steep discounts and refusing to accept an agreement signed by around 92 percent of bondholders. U.S. courts have also ruled that banks operating in New York must disclose information about non-U.S. assets of the Argentine government.

This financial dispute is entangled with a political relationship that is at best tense. The U.S. Department of State has criticized Kirchner’s government for interfering with freedom of the press, while Argentina has complained about U.S. espionage.

Merkel has similar problems, though of course, Germany is in a much stronger position than Argentina. The disclosure of NSA spying on Germany, including the tapping of Merkel’s own phone, and the refusal of the U.S. administration to offer any substantive redress have provoked much genuine (and some confected) outrage in Germany, culminating with the expulsion of the U.S. intelligence station chief in Berlin. Against this background, the U.S. Department of Justice (DoJ) is considering charges against German banks, including the partly state-owned Commerzbank accused of violating U.S. sanctions on Iran.

Meanwhile, the DoJ has announced an agreement by which Citigroup will pay $7 billion to avoid civil prosecution for its role in the sale of bogus mortgage-backed securities in the lead up to the global financial crisis. The deal also exempts Citigroup from any punishment in the much larger scale involving collateralized debt obligations (CDOs).

Looking at these events, it’s obvious that, while courts are involved, there is nothing like the rule of law at work here. The DoJ’s objectives in its dealing with Citigroup are entirely political. On the one hand is the need to recover from the political disaster of the ‘too big to jail’ episode, in which the DoJ deferred prosecution of HSBC, despite evidence of egregious criminal misconduct, for fear that the bank would fail, perhaps endangering the entire financial system. On the other hand, the commitment to maintain that system and most of the key players in much their current form remains intact. DoJ has decided that penalties of $7 billion (about six month’s profit for Citi) are sufficient to look serious, while having minimal actual impact.

Similarly, any decision on charging the German banks will depend on political judgments. The U.S. position is weakened first by the fact that it is attempting to enforce an extraterritorial imposition of U.S. foreign policy (the Iran sanctions) and second by the ham-fisted operations of the intelligence apparatus.

The political nature of the process is even more evident in Argentina’s case. Obviously, if the nationalities were reversed, with foreign ‘vultures’ upsetting a debt-restructuring agreement negotiated by, say, a U.S. city, within the U.S. political process, the Appeals court would have given the investors short shrift. Had the court somehow managed to decide in favor of the foreign party, the Supreme Court would certainly not have let the judgment stand.

All of this may seem self-evident from a viewpoint informed by international realism; as Thucydides puts it in the Melian dialog ‘the strong do what they can and the weak suffer what they must’. Yet the situation was totally different in the early 1990s, when the Argentine bonds now in dispute were issued.

At that time, international global bond markets, often referred to as the “Masters of the Universe” were seen as a ruthlessly rational force for financial probity, standing outside and above any national government. The U.S. government, by virtue of its role as issuer of the U.S. dollar was seen as a special case, bound by both its nature and its national interest to uphold the global order. Despite the shutdown of 1995-1996, the idea that the United States might default on its debt, or that the U.S. financial system might become insolvent, seemed unthinkable.

Meanwhile, Argentina, like other South American countries, had suffered the depredations of a series of authoritarian, demagogic and financially incompetent rulers, from the Perons, to the military junta led by a succession of brutal generals. By the time democracy was returned, the government of Carlos Menem was eager to accept the prescriptions of the “Washington Consensus” on privatization, budget balance and financial liberalization.

The willingness of members of Argentina’s political class to trust the U.S. financial system, rather than each other was demonstrated most dramatically by the establishment of a currency board tying the Argentine peso to the U.S. dollar. In these circumstances, the idea that there was some risk of political favoritism in allowing disputes regarding debt to be resolved in U.S. courts did not even occur to most people.

The reemergence of financial crisis in 1997 produced a deep recession in Argentina that ultimately led to the collapse of the currency board, and of the governing class that had produced it. The populist, arguably demagogic, government of Nestor Kirchner (later succeeded by his wife Cristina) defaulted on Argentina’s foreign debt, and successfully (or so it seemed) negotiated a resolution with the International Monetary Fund and the “Paris club” of international lenders. It is this agreement that has been upset by the judgment in favor of the “vultures.”

What will happen next? It is possible, although unlikely, that Argentina will pay up, thereby unraveling its agreement with the other creditors. Alternatively, it could default. The worst case, a full-scale default, could bring renewed chaos to the global financial system at a time when crises in Portugal and Bulgaria are already creating concerns.

A more likely possibility is a selective default, repudiating those dollar bonds to which New York law applies, while maintaining payment on the others. In the 1990s, such a maneuver would have been unthinkable; the reputational damage would have been the same as that of a full-scale default, and the punishment meted out by the ratings agencies would have been savage. But after the global financial crisis and the continuous drumbeat of scandal that has followed, both the ratings agencies and the financial system as a whole are thoroughly discredited.

The New York courts might be unhappy with such an outcome, but their decisions are unlikely to gain much respect outside the United States. Mexico, France and Brazil all filed briefs at the Supreme Court in support of Argentina, which also has the full support of the Organization of American States (except for the United States, Canada and Panama). The IMF also planned to intervene, but did not do so following pressure from within the U.S. government.

In a broader viewer, this episode is part of the unraveling of the global financial system that has been going on ever since the crisis of 2008. Before 2008, banks and other financial institutions could regard themselves as operating on a global scale. Their national subsidiaries might have to deal with national regulators, but the banks themselves answered to no one; rather, governments answered to them.

The bailouts, and the subsequent scandal made it clear that banks are multinational, rather than global or transnational institutions. Citigroup may have branches in thirty-six countries and subsidiaries in many more, but it is still a U.S. bank, just as HSBC is British and Deutsche Bank is German. In the end, Citigroup relies on the backing of the U.S. government, and can expect U.S. support in its dealings with its debtors, creditors and rivals. The same is true of its British, German and Japanese counterparts.

None of this should be surprising from a realist perspective. The idea of a global financial structure operating under impartial rules, without any overall supervising authority might have sounded appealing amid the financial-sector triumphalism of the 1990s. But looked at coldly, it is rather less realistic than the notion that national governments might agree to submit themselves to the judgment of collective bodies like the UN and the International Court of Justice. In reality, as soon as the going got tough, financial institutions of all kinds ran to their national governments and courts, demanding and getting preferential treatment.

Recent events have put this beyond doubt. The only remaining question is whether the common interest of sovereign states in reining in the financial sector will overcome their separate interests of backing their own “national champions.” In this respect, the outcome of the Argentinian crisis will be very revealing.