Puerto Rico Seeks de-facto Bankruptcy Protection Under New Law

...Puerto Rico has roughly $120 billion of bond debt and unfunded pension obligations to restructure, which dwarfs the second-largest similar episode. When Detroit went bankrupt in 2013, it set the previous record, with about $18 billion of bond debt and retirement obligations.

The island’s case will not be formally called a bankruptcy, since Puerto Rico is barred from using Chapter 9, the bankruptcy route normally used by insolvent local governments. Instead, the governor of Puerto Rico, Ricardo Rosselló, petitioned for relief under Title III of a new federal law for insolvent territorial governments, called Promesa. It contains some bankruptcy provisions and has never been used before, so there is no road map to follow.

Read the rest here.

This is going to send shock waves through the bond market, and that may be a good thing. Too many people have been placing too much confidence in paper I.O.U's. The basic law of economics still applies. If a debtor doesn't have the money to pay you back, it doesn't matter how many legal papers you wave under their nose, you're still not getting your money back.

People buying bonds issued by Greece, New Jersey, Illinois, the city of Chicago and a few other entities take note.