Am I alone in feeling that Argentina is the underdog in its latest dispute with U.S. hedge funds?

When I look through the financial papers they are in nearly universal agreement: Argentina is in default, and the fault is all on Argentina's side. But it doesn't feel that way to me.

In fact, the country insists it is not in default, and as evidence, it has handed over the money for interest payments to an American bank. In normal circumstances, a chunk of money is the test for whether a country, or a person, is in default. But not this time.

When a person or business — or a city like Detroit — borrows too much and gets to the point where they can never realistically pay it back, they are allowed to go bankrupt. There are various exceptions, but in general after bankruptcy, the remaining assets of the person or company or city are divided up fairly among the people who lent them money. 

Bankruptcy or restructuring?

An alternative is called "restructuring," where lenders agree to make payments more affordable in the hope of keeping a company alive so it can keep paying at least some of what it owes. Some of America's biggest companies, including General Motors, have done it.

But after the person or company is squeezed dry, the rules of bankruptcy are generally clear. As long as everything is done according to the rule book, bondholders and other creditors must be satisfied with the share they got, and can't come back for more. The person, the company or the city gets a fresh start.

With countries it's not so simple. In 2001, the time when Argentina was indisputably in default, almost everyone agreed the country was so far in debt, it would never be able to pay the money back. As with Detroit, the interest payments on the money Argentina owed were accumulating faster than the country's ability to tax. 

Argentine bonds were worth pennies on the dollar. And while over the years many bondholders accepted restructured payment terms, a few wily investors bought up those nearly valueless bonds. These bondholders are the ones called "vultures" by Argentina's government and "holdouts" by most of the American business press mentioned above.  

While completely legal, the idea of profiting from another's misfortune is not popular in American history. Carpetbaggers — northerners who rushed in to buy southern farms at dirt cheap prices after the civil war — have lent their name to the practice of exploitative business.

A profitable practice

There is no doubt such sharp practices can be profitable. The vulture fund Cerberus, named after the dog that guarded hell, partly because of the fact that it picked over the carcasses of dying companies, has grown so huge it is now respectable.

In some ways it is disappointing that the New York courts have thrown their support behind the vultures and against the country trying to get its financial house in order. But this is one of the other hazards of being a country rather than a person, a company or a crumbling U.S. city.

Unlike with a person or a company, it's hard to be sure when you have squeezed a country dry. You can't have all of Argentina's cows and mineral deposits.

There is no overarching rule book for national bankruptcy. So instead of overarching rules, when countries borrow money they do it by signing complicated contracts.

Of course, contracts are just piece of paper. I remember being in Hong Kong just as China was opening up to capitalism, and hearing of people who had signed contracts in Beijing without realizing there were no commercial law courts to enforce them. 

That's why businesses signing contracts in China began stipulating that they would be settled in Hong Kong where the courts were established and commercial law was strong. That is why when countries want to borrow from New York capital markets, they must have their contracts settled by New York courts.

Courts side with the hedge funds

It is the New York court that has made Argentina bankrupt by saying it may not pay other bondholders unless it pays the holdouts too. The capital markets are afraid of the power of the New York courts. That is why the U.S. business press is declaring Argentina bankrupt when it has already set the money aside to pay its debts.

Of course, the ruling of the court is legal. That is the definition of what a court decides. But to me it feels like bullying. The power of the strong ganging up against the weak. It does not feel just. 

It is said that Argentina is considering setting up its own capital markets so that it will not be under the power of U.S. courts. I'm not sure I would give my money to Argentina under those conditions.

But justice must be seen to be done even in commercial law. And in a rapidly changing world, if U.S. courts seem to be supporters of carpetbaggers and bullies, and against a goodwill attempt to restructure the debt of a country that could survive in no other way, perhaps sovereign borrowers will find other jurisdictions to raise the money they need.