Voluntary Subordination of Official Sector Debt: The City of Edinburgh, 1838

Abstract

Inspired by a proposal by Lee Buchheit and Mitu Gulati to try to help improve the debt tribulations currently afflicting Greece, and assisted by a serendipitous find (I was rather looking for ancient pari passu clauses in sovereign debt documentation; which I found), I analyze a historical case of gaining the favour of private creditors to a sovereign entity through the voluntary subordination of an official sector creditor to said sovereign debtor. In the early 19th century, Edinburgh was in financial distress owing lots of money to both private and public lenders and having troubles meeting those obligations. Obtaining further new funding was of the essence. A debt restructuring that would be both tough and amicable on creditors was thus required. After long and fruitless negotiations, the key to an agreement came from the UK Government, who agreed to grant the creditors preferred senior rights over certain revenues and properties backing secured claims on the city. Such voluntary governmental subordination did the trick. Thus, we see that the notion of enticing creditors into the desired actions through the sweetener of super senior status was already appreciated and put in practice almost two centuries before Greece embarked on its latest debt odyssey.

Keywords: official sector debt subordination, Greek debt, sovereign debt, pari passu