Puerto Rico Governor Alejandro García Padilla has announced that the island commonwealth's $72b (£45.7b) debt cannot be paid.
"The debt is not payable," Padilla said in an interview, according to the New York Times. "There is no other option. I would love to have an easier option. This is not politics, this is math."
In a speech on 29 June, he added, "The only way that we can climb out of this mire is if we come together and are willing—bondholders included—to assume shared sacrifices today, so that tomorrow we may all share the benefits of a growing economy."
According to the Times, the governor and senior members of his staff said they will most likely seek significant concessions from Puerto Rico's creditors. Those concessions could include deferring the debt payments for up to five years or extending the timetable for debt repayment.
The governor's admission could have far-reaching financial implications, the Times noted. The island, a commonwealth of the US, has accrued more municipal bond debt per capital than any other US state. In fact, Puerto Rico's bonds have a face value of about eight times that of Detriot's bonds.
The New York Times reported that debt relief of such massive scale could end up hurting other local governments as investors become more cautious of lending. The US municipal bond market has already been severely affected by the bankruptcies of Detroit and Stockton, California.
According to The Wall Street Journal, some analysts predict Puerto Rico's government may run out of money within a month, leading to a government shutdown, employee furloughs and other measures.
Both individual mutual funds investors and hedge funds investors stand to lose money. The Wall Street Journal reported that Puerto Rico creditors are also already facing potential losses.
A White House spokesman told reporters that the federal government would not provide the island a bailout, but would provide expertise and access to existing resources. The Obama administration noted that Congress should consider previous legislations that would allow Puerto Rico's public corporations the right to seek bankruptcy protection.
Following the governor's comments, Moody's Investors Services said the remarks "suggest a rising probability that the commonwealth will move to restructure the bulk of its bonded debt, even including those that are guarded by the strongest legal protections — primarily the central government's general obligation bonds."
Governor Padilla added: "We must make difficult decisions to meet the challenges we now know are ahead, and I intend to do everything in my power to lead us through this time."