Puerto Rico’s move could roil financial markets already dealing with the turmoil of the renewed debt crisis in Greece. It also raises questions about the once-staid municipal bond market, which states and cities count on to pay upfront costs for public improvements such as roads, parks and hospitals.
For many years, those bonds were considered safe investments — but those assumptions have been shifting in recent years as a small but steady string of U.S. municipalities, including Detroit, as well as Stockton and Vallejo in California, have tumbled into bankruptcy.
Those defaults at least offered investors the protection provided by Chapter 9 of the U.S. bankruptcy code, which sets out an orderly process by which investors can recoup at least some of their money. But like states, Puerto Rico is not permitted to file for bankruptcy. A failure to iron out an agreement with creditors could ignite an unwieldy, uncharted and long-lasting process to sort out the island’s financial obligations.
