(Reuters) - Puerto Rico announced a historic restructuring of its public debt on Wednesday, touching off what may be the biggest bankruptcy ever in the $3.8 trillion U.S. municipal bond market.

While it was not immediately clear just how much of Puerto Rico’s $70 billion of debt would be included in the bankruptcy filing, the case is sure to dwarf Detroit’s insolvency in 2013.

The move comes a day after several major creditors sued Puerto Rico over defaults its bonds.

Bankruptcy may not immediately change the day-to-day lives of Puerto Rico’s people, 45 percent of whom live in poverty, but it may lead to future cuts in pensions and worker benefits, and possibly a reduction in health and education services.

The island’s economy has been in recession for nearly 10 years, with an unemployment rate of about 11.0 percent, and the population has fallen by about 10 percent in the past decade.

The bankruptcy process will also 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.

BANKRUPTCY UNDER PROMESA LAW

The debt restructuring petition was filed by Puerto Rico’s financial oversight board in the U.S. District Court in Puerto Rico on Wednesday, and was made under Title III of last year’s U.S. Congressional rescue law known as PROMESA.

The Title III provision allows for a court debt restructuring process akin to U.S. bankruptcy protection. Puerto Rico is barred from a traditional municipal bankruptcy protection under Chapter 9 of the U.S. code.

The filing includes only Puerto Rico’s central government, which owes some $18 billion in debt backed by the island’s constitution.

On paper, it does not include $17 billion of sales tax-backed debt, known as COFINA debt, or debt from other agencies.

But those debts are likely to be pulled into the bankruptcy, or included in separate bankruptcy proceedings in coming days, Elias Sanchez, an adviser to Governor Ricardo Rossello, told Reuters on Wednesday.

Puerto Rico’s massive pension debts will also likely get restructured in the bankruptcy.

“Title III was especially compelled by the commonwealth’s need to restructure $49 billion of pension liabilities,” the oversight board said in Wednesday’s filing.

BIGGER BANKRUPTCY THAN DETROIT

The previous largest U.S. public bankruptcy, Detroit’s in 2013, covered some $18 billion in debt. The city was able to reach an agreed debt restructuring with stakeholders, in part by soliciting huge contributions from philanthropic foundations so it did not need to sell the city’s art collection.

But “unlike Detroit, there isn’t billions of unencumbered artwork to fund a restructuring” in Puerto Rico, said David Tawil, whose fund, Maglan Capital, held Puerto Rico general obligation debt but has since sold it.

The legal proceeding does not mean negotiations toward a compromise must stop, Governor Rossello said in a statement on Wednesday.

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

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 an out-of-court restructuring foundered.

Andrew Rosenberg, a lawyer for the general obligation bondholders, criticized the Title III filing, saying in a statement a consensual deal could have been reached.

“Just as a deal was within reach [on Tuesday], we understand that the oversight board intervened to block it,” Rosenberg said in a statement. “For months, the oversight board has made every effort to sabotage consensual negotiations.”

Francisco Cimadevilla, a spokesman for the board, denied the allegation, saying in an interview, “I can understand that might be a narrative on the other side, but it’s just not the case.”

Conversely, Susheel Kirpalani, a lawyer for COFINA bondholders, called bankruptcy “sound public policy,” saying in a statement it “enables Puerto Rico to freeze numerous lawsuits” and “maintain essential services.”

Analysts and experts agreed the case is likely to take time.

“It will be an orderly process that should be better for creditors in the aggregate than a chaotic and uncertain period involving proliferating lawsuits,” said Moody’s Investor Services analyst Ted Hampton.

Puerto Rico's Governor Ricardo Rossello addresses the audience during a meeting of the Financial Oversight and Management Board for Puerto Rico at the Convention Center in San Juan, Puerto Rico March 31, 2017. REUTERS/Alvin Baez

Some expect creditors to challenge the filing, arguing the board did not meet requirements under PROMESA to conduct good faith negotiations out of court.

“We would agree there is a case to be made here,” said Keefe Bruyette & Woods analyst Chas Tyson, who follows Puerto Rico.</s>It's the biggest municipal bankruptcy filing ever in the US. Puerto Rico currently owes its creditors a whopping $70 billion, far higher than Detroit's $18 billion bankruptcy in 2013.

"Given the deficit that we have inherited, it is my responsibility to guarantee the best interests of the Puerto Rican people," Governor Ricardo Rosselló said Wednesday.

Bankruptcy won't be an easy process. A judge still has to approve it. Many prominent Wall Street firms own Puerto Rico's bonds. They don't want the island to enter bankruptcy proceedings because it could mean they get paid back far less than what they are owed.

Puerto Rico's situation is ugly. The island has been in an economic recession for about a decade and the unemployment rate is 11.5%, meaning more than one in 10 adults can't find work.

The island's financial crisis is so bad that Congress installed a Fiscal Oversight Board to call the shots last year. The board stopped trying to negotiate with creditors this week and filed for bankruptcy.

Related: Puerto Rico's crisis: How did it get so bad?

On the campaign trail, Donald Trump said he would not "bail out" Puerto Rico. He repeated that again in a recent tweet.

Mick Mulvaney, Trump's budget director, said Wednesday that the White House pushed hard to ensure no federal dollars would go toward paying the island's debts in the latest Congressional budget deal.

People are literally fleeing Puerto Rico to go and live in the mainland US, especially Florida. The island's population has declined by 350,000 in the past 10 years. Even worse, CNNMoney found that a doctor a day has left Puerto Rico, causing a severe shortage of medical help as the island was fighting the Zika crisis.

As businesses and people say goodbye to Puerto Rico, there's even less money to pay back creditors. The island's latest budget plan includes only $800 million a year to pay back creditors. That's a mere 20% of what the island had been paying creditors in the past.

Related: Millions of Americans are still out of work

The bankruptcy process is a "positive step," says Ted Hampton, an analyst at Moody's Investors Service.

"Although a court proceeding will take considerable time and likely involve losses for all Puerto Rico bondholders, it will be an orderly process," Hampton says.

Last year, Congress approved a bill called PROMESA (Spanish for "promise") to try to help Puerto Rico. It created the oversight board and a special Title III process that is similar to the Chapter 9 bankruptcy provision that cities like Detroit have used in the past. Chapter 9 isn't an option for Puerto Rico since it is a US territory.</s>Puerto Rico teetered into insolvency Wednesday as the chronically troubled U.S. territory of 3.4 million citizens buckled under its ever-increasing debt, which stands at $73 billion.

The process that Puerto Rico has undertaken is a prelude to bankruptcy, but in this case it is tailored for governments. Given the size of the debt, it would be the largest such insolvency in U.S. history, far outstripping Detroit's $18 billion restructuring in 2013.

"Puerto Rico's problems have been decades in the making," said Michael Williams, the attorney who represented Puerto Rico in its financial crisis litigation until recently. "One can only hope that this filing puts Puerto Rico on the path to a fresh start."

Puerto Rico's situation is not dissimilar to Detroit's, which was the culmination of years of economic stagnation and bad policy. Puerto Rico, an island in the Caribbean that is about the size of Connecticut with half its gross domestic product, needs billions to stimulate its economy and upgrade its infrastructure, including its water and electrical delivery systems as well as waste collection. Both also face massive pension obligations.

A seven-member federal oversight board set Wednesday's events in motion when it filed in U.S. courts to place the territory under protection from a growing avalanche of bondholder lawsuits.

The oversight board was empowered under legislation known as the Puerto Rico Oversight, Management and Economic Stability Act, or PROMESA, to submit a plan to a court with the power to impose a settlement. A bankruptcy judge is expected to be appointed to oversee the process.

Investors had bought the bonds in the belief that Puerto Rico, like U.S. states, would not be allowed to fail and the debt would be protected. But many of the agencies that have issued government debt in Puerto Rico missed payments, putting them in default.

A maze of government-issued bonds through various taxing authorities and revenue streams complicated attempts by Puerto Rico to settle with bondholders.

"The complexity of Puerto Rico's debt, with multiple types of debt and classes of shareholders, make voluntary negotiated settlements more difficult," said Andrew Biggs, a resident scholar at the conservative American Enterprise Institute and a financial oversight board member. "It's possible that the prospect of legal adjudication will put new energy behind a negotiated settlement."

Sergio Marxuach of the Center for a New Economy in Puerto Rico, a left-of-center think tank, said the filing was necessary in light of the torrent of lawsuits the government faced. "There were 18 government agencies who were issuers with different securities, different collateral, with bondholders having interests against each other," he said. "Without an orderly legal process, these negotiations were going to take forever."

Gov. Ricardo Rosselló announced the proceedings Wednesday after his government failed to persuade creditors to accept less than what they are owed.

Some U.S. lawmakers were hopeful. House Natural Resources Committee Chairman Rob Bishop, R-Utah, who led last year's negotiations to create the financial oversight board, said that body must be given space to work: "We've got the pieces in place. I don't want Congress to try to superimpose on top of them and try to micromanage them."

Bishop said Congress should examine what role, if any, it can play in promoting a longer-term economic turnaround on the island. But Bishop urged caution for now. "You can't start a process and then stop it at the very beginning because we don't think it's doing what we want it to do yet," he said. "We've got to let the process play."

Rep. Nydia Velázquez, D-N.Y., who was born and raised in Puerto Rico, said that thanks to the law, the territory has the tools it needs to climb out of its crisis. "It is time for the government and the creditors to move forward in restructuring the public debt," she said.

It is unclear how much will be paid to holders of Puerto Rican government bonds. The territory had planned to cover less than a quarter of the debt that is due over the next 10 years.

A coalition representing a third of Puerto Rico's senior secured bondholders, with $2.5 billion at stake, applauded Rosselló's move, calling it "sound public policy and ... a much-needed step forward on the island's path to restructuring its debts in an orderly manner.

"This was certainly an option of last resort," according to the group, which includes retirees, investors and asset managers such as GoldenTree Asset Management, Merced Capital, Tilden Park Capital Management and Whitebox Advisors. "The move enables Puerto Rico to freeze numerous lawsuits, maintain essential services for its residents, and rely on a court-driven restructuring process to objectively determine respective creditors' rights."

Nader Tavakoli is the former chief executive of Ambac Financial Group, a large insurer of Puerto Rico debt. "A long and drawn-out battle with creditors will be catastrophic for Puerto Rico and its people," he said. "It's difficult to see how Puerto Rico will have access to the large amounts of affordable capital needed to revitalize the island without consensus with its existing creditors."

Unsecured creditors and junior bondholders have taken significant losses in past restructurings, such as in Detroit, and are probably more vulnerable to large losses in Puerto Rico.

"Puerto Rico's bankruptcy is unique in size," Williams said. "But it's not just the size of the problem that is unique. It was the long-standing absence of a legal path for restructuring its debt that contributed to this."

President Barack Obama signed the PROMESA legislation over the summer as the territory's financial situation grew dire and the economic death spiral took hold.

The island territory, 1,500 miles from Washington, saw its population plummet to 3.4 million from more than 5 million. Its economy has withered, its debt has mounted, and the unemployment rate has settled into double digits. The territory's agriculture department suspended subsidies to farmers. Businesses experienced power failures from the state-owned utility. The treasury withheld tax refunds.

Many suppliers, unpaid and unwilling to extend commercial credit, began demanding payment on delivery by a government that owes them a total of $2 billion.

One building contractor who was owed more than $1 million received two payments from the Government Development Bank for a total of $164,030 — only to see them bounce.</s>“We’re going to protect our people.” Hedge funds reel.

Puerto Rico’s Governor Ricardo Rosselló took the momentous step on Wednesday to trigger the largest municipal bankruptcy-type process in the US, four times larger than the prior record - Detroit’s bankruptcy.

Puerto Rico’s population has declined by about 10% since 2004 to 3.4 million. Its economy has declined by as much since 2005. Unemployment is at 14%. Public deficits have ballooned. Puerto Rico and over a dozen agencies, after years of reckless spending amid an aiding and abetting bond market, piled up about $73 billion in debt. That this was a mega problem became official two years ago; bonds crashed, and bond insurers got clobbered.

As multiple defaults have rippled through Puerto Rico’s debt since then, hedge funds jumped into the fray and snapped up the beaten-down bonds. They figured since US states cannot file for bankruptcy the US territory couldn’t either, and that much of the debt would have to be repaid, no matter what the cost to Puerto Rico and its people.

This calculus took a serious hit today.

“We’re going to protect our people,” Gov. Rosselló announced at the press conference in San Juan, after holders of defaulted bonds had filed a slew of lawsuits. He said one of the lawsuits claimed that bondholders should get all revenues generated by Puerto Rico’s Treasury Department. “I’m not going to allow that to happen,” he said.

The emailed statement by the Office of the Governor puts it this way:

In order to ensure the essential services to the public, the payment of the government payroll and the suppliers, Governor Ricardo Rosselló notified yesterday to the Fiscal Oversight Board (FOB) that the Government of Puerto Rico wishes to seek protection under Title III of the PROMESA Act. After extensive discussions in good faith and the opening of the financial books of the Government of Puerto Rico to the creditors, there has not been sufficient progress in the negotiations, so that Title III of the PROMESA Act allows for a special court to restructure the public debt of Puerto Rico.

This is the bankruptcy-type process created last year by US law to help Puerto Rico restructure its debt under the supervision of a federal district court and emerge from its terrible debt crisis.

“The board has agreed to submit Title III protection immediately and they will submit it,” the governor said.

Thus the commonwealth is entering into the bankruptcy-like process. A federal district court judge will preside over figuring out how to restructure a certain part of Puerto Rico’s debt, how big the haircuts will be, and how long payments will be stretched out.

“We remain committed to maintaining negotiations in good faith to reach agreements with creditors,” Rosselló said. “The best example that shows we can have dialogue is the Restructuring Support Agreement recently established with the creditors of the Puerto Rico Electric Power Authority. However, given the deficit that we have inherited, it is my responsibility to guarantee the best interests of the Puerto Rican people.”

Rosselló, who has been governor since January 2017, pointed out that during the transition hearings in December, it was revealed that the government deficit was actually $7.6 billion and not $3.2 billion, as the previous Administration had reported. He added:

We are here to address the problems of Puerto Rico, not to look at the past, and I am convinced that our Island will be able to resume the path of economic development with the correct steps by the Government and the determination of each of its residents.” It is my hope that the Government’s Title III proceedings will accelerate the negotiation process, leading to as much creditor consensus where possible and achieving where necessary a prompt and efficient judicial resolution of any issues or disputes.”

Bondholders have 120 days to challenge the move.

According to the Associated Press, the governor’s representative to the board, Elias Sanchez, explained that unlike a standard bankruptcy in the US, a judge cannot unilaterally seize any of Puerto Rico’s assets without prior authorization from the federal control board.

No one knows how long the process will take and how big the losses will be for bondholders, only that it will take a long time and that the losses will be big. Puerto Rico is preparing to implement a number of austerity measures – for years to come. Uncertainty abounds. New investors that Puerto Rico needs are skittish. The government is still running a deficit. Practically no one is going to come out ahead in this deal.

Puerto Rico’s general obligation bonds due in 2023, among the most active according to Bloomberg, traded for an average of 66 cents on the dollar on Wednesday.

The US municipal bond market, which has been asleep under the soothing mantra that munis practically never default, needs to wake up. There are a number of states in the US, such as Illinois, that sooner or later will contemplate a similar fate for their bondholders and pressure will build on Congress to allow it.

And there are plenty of cities, school districts, and other municipalities lining up for relief. Pension obligations weigh heavily, and someone is going to take the hit.

Default risk is real, even if it has been dragged out and watered down by the Fed’s interest rate repression and the chase for yield by desperate investors that will buy anything – even junk-rated bonds issued by Chicago – thus keeping the scheme afloat a while longer. But debt, when it has become too large to be dealt with, doesn’t just go away quietly.

Chicago is already taking up a special place in the housing scenario playing out in the top rental markets in the US. Read… The Great Unwind Grips the 12 Hottest US Rental Markets</s>Facing mountainous debt and population loss, the board overseeing Puerto Rico filed Wednesday for the equivalent of bankruptcy protection in a historic move that's sure to trigger a fierce legal battle with the fate of the island's citizens, creditors and workers at stake.

The oversight board appointed to lead the U.S. territory back to fiscal sustainability declared in a court filing that it is "unable to provide its citizens effective services," crushed by $74 billion in debts and $49 billion in pension liabilities.

The filing casts a shadow of uncertainty over the future of Puerto Rico pensioners, American retirees who own the island's debt, institutional investors who backed the island in good times and businesses with lucrative contracts.

But it could also provide hope to residents seeking to preserve access to basic services such as public safety and health care, while also offering a potential route to economic stability for an island that has been suffering for years. Puerto Rico officials have complained that their debt crisis has cut off funds needed to pay doctors and run schools.

Puerto Rico has lost 20% of its jobs since 2007 and 10% of its population, sparking an economic crisis that worsens by the day.

The island's response has worsened matters. Politicians raised taxes, allowed governmental bureaucracy to balloon, borrowed to pay the bills and promised pensions that the island could not afford.

"The result is that Puerto Rico can no longer fully pay its debt and pay for government services," the oversight board said in the court filing. "Nor can Puerto Rico refinance its debt — it no longer has access to the capital markets. In short, Puerto Rico’s crisis has reached a breaking point."

The island's slumping economy was, perhaps, the final straw. Some six in 10 Puerto Ricans are unemployed or not interested in working, and nearly half are enrolled in Medicaid.

Puerto Ricans are U.S. citizens and can move to the mainland at any time, draining the island's tax base. Tens of thousands have streamed into Florida.

The legal case is not technically considered a bankruptcy filing under the federal code that governs municipal cases, but it's similar. Instead, it was filed through a bankruptcy-like mechanism dubbed Title III of legislation authorized by Congress and signed into law by President Obama in 2016.

What happens next?

U.S. Supreme Court Chief Justice John Roberts will appoint a life-tenured judge, likely a U.S. District Court judge, to oversee the case, said Melissa Jacoby, a University of North Carolina law professor and expert on municipal bankruptcy.

That's different than Chapter 9 municipal bankruptcy cases, where a bankruptcy judge controls the process.

The person appointed to oversee the case will have significant power over how it unfolds.

This particular debt-cutting process has never occurred, so the lack of legal precedent could leave the judge with much sway over the future of Puerto Rico.

What does the oversight board do?

The oversight board will aim to negotiate debt cuts with creditors, after which it will propose a plan of adjustment. The judge will decide whether to authorize the plan, which could lead to massive debt cuts.

How will investors be treated?

To be sure, it depends on the status of their debt. If they hold secured bonds, they might get paid in full. But unsecured bondholders could suffer significant cuts, depending on which types of debt the judge determines to be vulnerable.

Financial creditors, including major investors that had bet on Puerto Rico bonds that were exempt from federal, state and local taxes, argue that their investments were made when the island was not eligible for bankruptcy.

But Congress passed the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) specifically to create a process that allows the island's numerous debt-saddled governmental entities to achieve debt relief.

Complicating matters is the various governmental entities included in the bankruptcy filing, each of which has its own investors and creditors wanting to be paid.

"It really isn’t clear how creditors stack up against each other," Jacoby said.

Moody's Investor Service Vice President Ted Hampton concluded Wednesday that the bankruptcy filing is actually "a positive step for bondholders overall" because it will bring about "orderly process that should be better for creditors in the aggregate than a chaotic and uncertain period involving proliferating lawsuits."

What happens to Puerto Rico pensioners?

They might face cuts because Puerto Rico has run out of pension funds.

In the Chapter 9 bankruptcy of Detroit, retirees agreed to accept cuts after a federal judge ruled that their pensions could be cut in municipal bankruptcy. That could pave the way for a similar ruling in Puerto Rico.

The PROMESA law states that the oversight board must identify a fiscal plan that will "provide adequate funding for public pension systems."

Puerto Rico pensioners also have certain legal protections, but inside of bankruptcy those protections can collapse. That's exactly what happened in Detroit.

That's why pension cuts and reductions to health care insurance could be in the cards.

But pensioners may still fare better than investors, Municipal Market Analytics analyst Matt Fabian suggested Tuesday in a research note. That's because pensioners are more politically empathetic than Wall Street creditors and bond insurers.

Could Puerto Rico sell off assets to pay some debts?

That's possible. In Detroit, which had $18 billion in debt, the city faced pressure from creditors and pensioners to consider selling off the city-owned Detroit Institute of Arts. The city instead negotiated a deal to avoid liquidating art and collected an infusion of cash from private donors and the state of Michigan.

The city could not be forced to sell assets because Chapter 9 bankruptcy prevents federal judges from ordering municipalities to take such actions.

Similarly, PROMESA dictates that the court may not "interfere with" the island's "property or revenues," without the oversight board's consent.

So a judge may not be able to order the island to sell off beachfront property.

But that doesn't mean creditors won't try to pressure the island into it.

"I wouldn’t be surprised because we’ve seen it in other contexts," Jacoby said.</s>The governor of Puerto Rico, Ricardo Rosselló, announced Wednesday that he would move the effort to solve the island’s debt crisis to federal Bankruptcy Court.

Rossello’s decision came after extensive negotiations with creditors stalled, resulting in the creditors suing the government over defaults on the debt.

“Given the deficit that we have inherited, it is my responsibility to guarantee the best interests of the Puerto Rican people,” Rossello said at a news conference. “We are here to address the problems of Puerto Rico, not to look at the past, and I am convinced that our island will be able to resume the path of economic development with the correct steps of the government and the commitment of each one of its residents.”

In the midst of Puerto Rico’s financial calamity, Rossello, a scientist and the son of a former governor of the island, has been advocating for Puerto Rico to gain statehood as a means to help it dig out from $70 billion in public debt.

A referendum for statehood is planned for June 11.

Unlike the 50 states, Puerto Rico is not allowed to restructure its debt under Chapter 9 bankruptcy protection because it is a U.S. territory.

The island will petition for financial relief under a federal law that was passed last July under the Obama administration called Promesa, which includes an oversight board that would help the island manage its public finances.

By invoking Title III of Promesa, Rosselló asked for an in-court debt restructuring process.

In addition to the island’s financial woes, Puerto Rico faces a brain drain problem, high unemployment and an aging population that has placed a strain on the economy.

Many of the island’s doctors and business professionals have left and the unemployment rate hovers at 11.5% which is lower than its long-term average of 15.1%, according to the Bureau of Labor Statistics.

Another concern is Puerto Rico’s Medicaid program. If it runs out of funds it could result in 900,000 residents losing healthcare by the end of the year.</s>Puerto Rico’s financial oversight board on Wednesday filed for a form of bankruptcy protection under last year’s federal rescue law known as PROMESA, touching off the biggest bankruptcy in the history of the U.S. municipal debt market.

The move comes a day after several major creditors sued the U.S. territory and its Governor Ricardo Rossello over defaults on the island’s $70 billion in bonds.

The request came under Title III of the PROMESA law is an in-court debt restructuring process akin to U.S. bankruptcy protection, as Puerto Rico is barred from traditional bankruptcy because it is a U.S. territory. The case was filed in U.S. District Court in Puerto Rico.

The process will 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.

“The governor needed to show that his primary allegiance lies with the citizens of Puerto Rico, and that was the justification for the filing,” said David Tawil, whose fund, Maglan Capital, held Puerto Rico GO debt but has since sold it. “I’m not sure whether bondholders are going to get any better treatment or recovery under this course of action.”

The legal proceeding does not mean negotiations toward a consensual restructuring agreement must stop, the governor said in a statement on Wednesday.

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

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.

Puerto Rico and its general obligation bondholders, whose $18 billion of debt is backed by the island’s constitution, were negotiating until the last minute.

GO holders offered to accept cuts of 10 cents on the dollar, Elias Sanchez, Rossello’s liaison to the oversight board, told Reuters on Wednesday.

The government responded with an offer to repay 70 percent of claims through new bonds, and another 20 cents through a “growth” bond, payable only if Puerto Rico surpassed fiscal projections.

The sides could not reach a deal, and GO creditors sued the island on Tuesday.</s>Puerto Rico is requesting bankruptcy protection, Gov. Ricardo Rosselló said Wednesday, setting up a showdown with Wall Street firms owed billions of dollars in the largest-ever U.S. municipal debt restructuring and further complicating the U.S. territory's efforts to pull itself out of a financial mess.

The governor said he would petition Puerto Rico's federal oversight board to invoke a quasi-bankruptcy law that puts its standoff with creditors before a judge. His decision marks the start to what could be a lengthy legal fight as Wall Street watches closely to see how other indebted municipal governments may fare in confrontations with investors.

Puerto Rico and its agencies owe $73 billion to creditors, dwarfing the roughly $18 billion owed by the city of Detroit when it entered what was previously the largest municipal bankruptcy in 2013.

Write to Andrew Scurria at Andrew.Scurria@wsj.com and Matthieu Wirz at matthieu.wirz@wsj.com</s>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.</s>U.S. commonwealth Puerto Rico is planning to seek a court-supervised restructuring of some $73 billion in outstanding debt. The cash-strapped island's governor, Ricardo Rossell�, will petition the commonwealth's oversight board to enact rule Title III--a court-supervised bankruptcy-like restructuring process that would allow it to rework billions in debt owed to creditors, including hedge funds and banks. Puerto Rico is not technically a municipality and therefore isn't covered by U.S. bankruptcy law under Chapter 9, but a federal oversight board was created by a bill passed in Congress under President Barack Obama last June that grants the commonwealth bankruptcy-like protections. The move follows negotiations with Puerto Rico's obligations that have so far failed to result in an agreement. Puerto Rico's efforts to retool its debtload have been a longstanding problem for the island. "We are here to address the problems of Puerto Rico, not to look at the past, and I am convinced that our island will be able to resume the path of economic development with the correct steps by the government and the determination of each of its residents," said Gov. Rossell� at a news conference on Wednesday to discuss Puerto Rico's move.
Puerto Rico files for the largest "local government" bankruptcy in the United States.