Puerto Rico Governor Ricardo Rossello said on Wednesday he would move to begin a form of bankruptcy for the island or particular public agencies under Title III of last year's Puerto Rico rescue law known as PROMESA.
Rossello said he is requesting that the island's financial oversight board initiate a Title III, a day after several major creditors sued his government over defaults on the island's $70 billion in bonds.
A bankruptcy process for Puerto Rico would be the largest in the history of the $3.8 trillion U.S. municipal debt market. It would give Puerto Rico the legal ability to impose drastic discounts on creditor recoveries, but could also spook investors and prolong the island's lack of access to debt markets.
Title III is an in-court debt restructuring process akin to U.S. bankruptcy protection, since Puerto Rico is barred from using Chapter 9 of the U.S. federal bankruptcy code reserved for insolvent public entities.
The legal proceeding does not mean negotiations toward a consensual restructuring agreement must stop though, the governor said.
"It is my wish that the Government's Title III processes accelerate the negotiation process by bringing the greatest possible consensus," the governor said in the statement, which was in Spanish.
Rossello's fiscal plan for the island, approved by the oversight board in March, forecasts Puerto Rico having only $800 million a year to pay debt, less than a quarter of what it owes. The low figure alienated creditors, and negotiations toward a restructuring deal have foundered.
In addition to its debt, Puerto Rico is facing a 45 percent poverty rate, a shrinking population and unemployment more than twice the U.S. average.