In what could amount to be the biggest declaration of bankruptcy by a local government in the United States, the governor of Puerto Rico, Ricardo Rossello has asked for a restructuring of a part of the bond debt to be supervised by the courts. Currently, the combined municipal bond market in the United States is worth $3.8 trillion while Puerto Rico’s bond debt stands at more than $70 billion.

The development follows the suing of the U.S. territory by a couple of major creditors over defaults. While the lives of Puerto Ricans may not be immediately changed by the bankruptcy process, it may lead to a reduction in worker benefits and pensions in the future. Education and health services may also suffer as funding for them could be cut.

Decade-long recession

The economy of Puerto Rico has been experiencing a recession for almost a decade and an unemployment rate of around 11%. Puerto Rico’s population has also declined by around 10% in the last 10 years.

With the bankruptcy process, the island could be legally empowered to impose huge discounts on the debt it holds. This could, however, damage the island’s reputation with investors and make it even harder for the U.S. territory to access the debt markets.

Financial oversight board

Filing of the debt restructuring petition was done by the financial oversight board of Puerto Rico. This was under PROMESA’s Title III. PROMESA is a rescue law that was drawn up by the U.S. Congress in 2016. Under Title III, the debt restructuring process will be supervised by the courts and is similar to the regular bankruptcy protection. Currently, the law bars the island from the regular municipal bankruptcy protection.

Despite the move, the governor of Puerto Rico expressed hope that the legal proceeding would not put an end to the negotiations between the island and its creditors.

“It is my hope that the Government’s Title III proceedings will accelerate the negotiation process,” Costello said in a statement.

General obligation bondholders

The governor’s fiscal plan for the U.S. territory is to have Puerto Rico pay just $800 million annually. This is less than 25% of what Puerto Rico owes.

Immediately after the Title III filing, a lawyer representing general obligation bondholders, Andrew Rosenberg, criticized the move saying it came at a wrong time since a deal was just about to be reached. Rosenberg suggested that the oversight board had deliberately filed the legal process in order to block a consensus deal. The oversight’s board spokesperson Francisco Cimadevilla, however, denied the allegation.