Puerto Rico defaulted on a $58 million bond payment on Monday, a risky move that seemed to intensify the pressure on creditors for broader debt renegotiation, but might also make future borrowing far more difficult, As Mary Williams Walsh reports in this article for The New York Times.

Whether Puerto Rico would make the payments was a subject of intense speculation among legal and financial experts for days as Monday’s deadline approached. Although the island made a payment on the interest of about $628,000, it said it lacked the funds to pay the full amount.

In a statement, Melba Acosta Febo, president of the Government Development Bank for Puerto Rico, which owes the money, said: “This was a decision that reflects the serious concerns about the commonwealth’s liquidity.”

Puerto Rico is carrying immense debt, in excess of $72 billion, that has raised serious questions about its financial future. Although it has come close to default before, the step on Monday was the first since it came under jurisdiction of the United States 117 years ago.

The bank attributed the decision not to make the payment to a failure by the legislature to appropriate the money.

Puerto Rico’s governor, Alejandro García Padilla, has called the total debt “unpayable” and is calling for a broadly based debt moratorium; details are to be released on Sept. 1.

But some big institutional bondholders are disputing the idea that a global restructuring is necessary and are warning that unilateral actions by Puerto Rico will cause disruption and pain on the island, similar to the dislocations in Greece.

Unlike the Greek sovereign debt, many of Puerto Rico’s bonds have ended up in the hands of Main Street investors on the United States mainland, people who invested in mutual fundswithout checking to see what was in the funds’ portfolios. Mutual funds bought them because when first issued they had investment-grade ratings and paid above-average yields.

Now, though, the ratings are deep in junk territory, and many of those ordinary investors are facing a rough ride.

“This is a first in what we believe will be broad defaults on commonwealth debt,” said Emily Raimes, a vice president at Moody’s Investors Service.

Standard & Poor’s took a similar stance, saying in a statement: “We believe the default signals severe liquidity distress, whereby Puerto Rico must now choose among which financial obligations it can honor.” It also predicted other defaults were possible over the next few months.

While Puerto Rico made some other bond payments that were due on Monday, attention in the financial markets was focused on the decision to skip the $58 million in payments due on about 20 so-called moral obligation bonds. Those bonds were issued by a subsidiary of the Government Development Bank for a variety of projects — including school construction and the creation of landfills.

The government bank initially financed the projects, then refinanced them through its subsidiary, the Public Finance Corporation. By tapping themunicipal bond market in that way, the bank removed the liabilities from its own balance sheet.

Although this particular type of bond does not carry with it a legal requirement for repayment in the absence of a budget appropriation, market experts said Puerto Rico’s decision not to pay amounted to a default and left them perplexed about the strategy of paying some bonds while letting others lapse.

“It’s almost a kamikaze strategy,” said Sergio M. Marxuach, public policy director at the Center for a New Economy, a research institute in San Juan.

Mr. Marxuach said the government seemed to be hoping to attract attention in Congress, where a bill that would give certain public enterprises on the island access to bankruptcy court has been languishing. He predicted that Congress would do nothing for Puerto Rico before the August recess, and in the meantime the default would bring market turmoil and opposition.

As of Friday, Puerto Rico’s bonds over all had already lost more than 10 percent of their value from the start of the year, closing at their lowest point since July 2009 as it became clear that the government was unlikely to make the $58 million payment.

J. R. Rieger, who tracks a broad sample of Puerto Rico’s bonds at S.&P. Dow Jones Indices, said that he was concerned not just about the portfolio losses but also that the market for Puerto Rico bonds might now dry up completely.

“Once a bond defaults, the number of buyers who are able to buy truly distressed debt is smaller,” he said, adding, “Will there be enough buyers to sustain an orderly market in Puerto Rico’s bonds?”

If demand for Puerto Rico’s debt dwindles, the financial institutions that now hold its bonds will be unable to unwind their positions without realizing losses. The scale of the losses could vary widely, though, because Puerto Rico’s total $72 billion of bonded debt has been issued by multiple entities, using a bewildering array of terms, repayment mechanisms, governmental guarantees and other features.

Confusing the situation further, the bonds that defaulted on Monday were sold with a guarantee, in the form of an irrevocable letter of credit issued by the Government Development Bank.

The letter of credit made the bonds look safer. It said that in the event the Public Finance Corporation failed to make a payment, a trustee for the bondholders would be able to draw the money owed them from the Government Development Bank.

But as investors have prepared for the default, they learned that the bonds’ prospectus does not describe this safety feature the same way the bonds’ indenture does, leaving confusion about what it takes to activate the letter of credit, or whether the guarantee is meaningful at all.

Officials in Puerto Rico have said that the bonds were backed by yearly budget appropriations, and that if an appropriation did not happen, the bonds would not be paid that year and the holders would have no legal recourse — in effect, there would not be any default to cure.

Ms. Acosta said that $628,000 was available for a partial payment because that much money was left over from appropriations in previous years.

“The terms of these bonds,” she said, “stipulate that these obligations are payable solely from funds specifically appropriated by the legislature.”

Market participants dispute that assertion. But they said on Monday that investors might have to file suit in a Puerto Rico court to get a declaration of default, and there was no guarantee that the court would issue one. Then Puerto Rico might be able to turn around and sue the investors, saying their accusations of default had caused it irreparable legal and financial harm.

That could cast the overall debt in an unflattering light of Wall Street versus the people, possibly hardening the positions taken on other debts as the situation evolves. Investors in the bonds of Puerto Rico’s big electrical authority have been negotiating for months on a consensual restructuring of its $9 billion in bonds, for example. It was not clear on Monday whether those talks could continue, given that lack of payment on the moral obligation bonds.

Dwindling demand for Puerto Rico’s bonds could intensify the island’s mounting liquidity problems. Puerto Rico stands to lose whatever ability it still has to borrow at an acceptable price, and it needs more cash to continue normal government operations. As recently as last week, its officials were talking about possibly borrowing as much as $500 million.

“Since Puerto Rico is not a sovereign country, and we’re not a state of the union, we’re really in limbo,” Mr. Marxuach said.

If Puerto Rico were a state, he said, it would have the power to send its cities, school districts and other units of government into Chapter 9 municipal bankruptcy. But as it is not a state, Puerto Rico has no such standing.

For the original report go to http://www.nytimes.com/2015/08/04/business/dealbook/puerto-rico-decides-to-skip-bond-payment.html?emc=edit_th_20150804&nl=todaysheadlines&nlid=41473240