Puerto Rico's collapse also shows the pressure than can emerge when retirement systems run out of cash. More than 45 percent of the 3.4 million U.S. residents on the island live below the poverty line, with the unemployment rate more than double the United States national average.
Puerto Rico and its agencies owe $73 billion to creditors, dwarfing the roughly $18 billion owed by the city of Detroit when it entered what was previously the largest municipal bankruptcy in 2013.
Puerto Rico's governor turned to the courts Wednesday to protect the USA territory from its crushing $73 billion debt in the largest effort ever made by a US government to shield itself from creditors.
Some of the island's debts will go before a federal bankruptcy court, making it the largest USA government entity to seek such protection from creditors.
Puerto Rico's debt has been growing over the last few years and now stands at $70 billion.
Puerto Rican officials have already imposed austerity, including cuts to worker benefits and pensions, and have said the debt cuts are needed to spare the already-poor island from even more severe cuts to quality of life. Bondholders can not challenge Rossello's decision until 120 days from now.
As The Wall Street Journal reports, Puerto Rico will now "face off against angry hedge funds, mutual funds and bond insurers in the court-supervised proceeding known as Title III, a legal mechanism created by Congress to restructure debts by force if negotiations broke down". Congress recognizes the crisis in the Commonwealth and its instrumentalities, and explains the fiscal emergency that renders the Commonwealth unable to provide its citizens effective services, while suffering the outmigration of residents and businesses. By comparison, the USA city of Detroit had $9.3 billion of obligations when it filed for bankruptcy in 2013 in the biggest US municipal bankruptcy ever. The city was able to reach an agreed debt restructuring with stakeholders, in part by soliciting huge contributions from philanthropic foundations so it did not need to sell the city's art collection. But he said embracing a bankruptcy-like process could be an option if negotiations fail.
Gov. Ricardo Rossello said Wednesday that a federal control board overseeing the island's finances has agreed with his request to put the debts before a court.
Rossello sent a letter to the Financial Oversight and Management Board on Tuesday, saying he hopes the Title III proceedings will "accelerate the negotiation process, leading to as much creditor consensus where possible and achieving where necessary a prompt and efficient judicial resolution of any issues or disputes".
Francisco Cimadevilla, a spokesman for the board, denied the allegation, saying in an interview, "I can understand that might be a narrative on the other side, but it's just not the case".
"Make no mistake: The board has chosen to turn Puerto Rico into the next Argentina", says Andrew Rosenberg, a lawyer at Paul, Weiss, Rifkind, Wharton and Garrison, who is advising some of Puerto Rico's bondholders.
Analysts and experts agreed the case is likely to take time.