Debt-plagued Puerto Rico defaulted on a bond payment for the first time on Monday, triggering what is likely to be a long battle with creditors as it seeks to restructure some $73 billion in loans.

The U.S. territory, whose governor has declared its debts “unpayable” and is seeking the largest restructuring ever in the country’s municipal bond market, paid just $628,000 of a $58 million payment owed by its Public Finance Corp. because the legislature didn’t provide enough money, according to the island’s Government Development Bank.

“Due to the lack of appropriated funds for this fiscal year the entirety of the PFC payment was not made today,” bank president Melba Acosta Febo said in a statement. “This was a decision that reflects the serious concerns about the commonwealth’s liquidity in combination with the balance of obligations to our creditors and the equally important obligations to the people of Puerto Rico to ensure the essential services they deserve are maintained.”

The default marks an escalation of the financial crisis on the island, which has been caught in a nearly decade-long recession that has crimped government revenues and triggered an exodus to the U.S. mainland.

Moody’s Investor Services, which tracks the bond market, said the default is likely the first of many to come. “This event is consistent with our belief that Puerto Rico does not have the resources to market its forthcoming debt payments,” Emily Raimes, a Moody’s vice presdent, said in a statement. “This is the first of what we believe will be broad defaults on commonwealth debt.”

Last month, Puerto Rico Gov. Alejandro Garcia Padilla declared the island’s debts “unpayable,” and called on creditors to come to the table to renegotiate repayment terms. Currently, Puerto Rico – unlike cities like Detroit or Vallejo, California – cannot seek protection under Chapter 9 of the U.S. Bankruptcy Code. Garcia Padilla has called on U.S. lawmakers to grant Puerto Rico’s state-run corporations, which are highly indebted and provide vital services from electricty to water, the right to file for bankruptcy. That would allow those corporations an orderly process to restructure its obligations.

The Obama administration has voiced support for allowing the island’s corporations bankruptcy protection, but it has continuously emphasized that there will be no federal bailout for Puerto Rico.


In a letter last week to Sen. Orrin Hatch, R-Utah, chairman of the Senate Finance Committee, Treasury Secretary Jacob Lew called Puerto Rico’s financial situation “urgent” and said Congress should consider some orderly process to restructure the island’s debt.

He also voiced support for ongoing efforts on the island to devise a long-term fiscal plan that points to how the island would fix its fiscal problems if they are given debt relief. A group of Puerto Rico policy makers is expected to present the restructuring plan at the end of this month.

Although some policymakers have embraced the idea of financial restructuring for Puerto Rico, many investors are opposed. They believe the island could continue to raise taxes, or utility rates, to pay what it owes. Moreover, they say, one reason they decided to loan money to the economically distressed commonwealth is precisely because it could not declare bankruptcy.