(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. ||||| Puerto Rico Makes Unprecedented Move To Restructure Billions In Debt 
 
 Enlarge this image toggle caption Joe Raedle/Getty Images Joe Raedle/Getty Images 
 
 Puerto Rico has asked for a form of bankruptcy protection to help it grapple with more than $70 billion in public-sector debt. The unprecedented maneuver, requested by the governor and filed shortly afterward by a federal oversight board, sets in motion what would likely be the largest municipal debt restructuring in U.S. history. 
 
 By comparison, Detroit's 2013 bankruptcy, which sought relief from some $18.5 billion in debt and liabilities, made it the largest such filing in the country's history at the time. 
 
 "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," the U.S. territory's governor, Ricardo Rossello, said in a statement. 
 
 The situation now heads to federal court, where the struggle between Puerto Rico and its disgruntled creditors will be decided. The territory also has more than $49 billion in pension liabilities. 
 
 But don't call it a "bankruptcy," exactly, since the territory isn't technically eligible for the same Chapter 9 protection as states. Rather, Congress passed a law last year specifically to deal with Puerto Rico's debt problem, which has been simmering for years. Among other things, the law, called PROMESA, set up a federal oversight board to handle the territory's debt negotiations and imposed a stay on financial obligations it owed. 
 
 It set up a bankruptcy-like process tailor-made for Puerto Rico. NPR's Camila Domonoske recently broke down the procedure: 
 
 "PROMESA doesn't call this 'bankruptcy,' and it's not identical to Chapter 9. But the underlying principles are the same. " 'It mirrors conventional bankruptcy processes that are ordered and arbitrated through a court system,' says Eric LeCompte, the executive director of Jubilee USA Networks, a religious development organization that supports debt relief and debt forgiveness. "The 'Title III' process, as it's called in PROMESA, allows Puerto Rico to address all of its debts at once, in a comprehensive process — which even Chapter 9 doesn't allow, LeCompte says. It's essentially a bankruptcy process custom-built for Puerto Rico's debt crisis." 
 
 The island has been grappling with runaway debts for years, though the situation finally reached a crisis in 2015, when the island's governor at the time announced that its debts were unpayable as long as it hoped to provide basic services to residents. 
 
 Camila notes that since then, Puerto Rico has been buffeted by "defaults on loan payments, budget cuts and tax hikes" — including significant austerity measures for Puerto Ricans. 
 
 And those economic woes have taken their toll. In a court filing Wednesday, the federal oversight board laid out some grim numbers: 
 
 Puerto Rico's labor participation rate is only about two-thirds that of the U.S. mainland. 
 
 The territory's population has dropped by 10 percent since 2007. 
 
 Nearly half of Puerto Rico's residents live below the federal poverty level. 
 
 The stay imposed by PROMESA expired overnight Monday, and The New York Times reports that right on cue, "bondholder groups and at least one bond insurer sued" on Tuesday. 
 
 As The Wall Street Journal reports, Puerto Rico will now "face off against angry hedge funds, mutual funds and bond insurers in the court-supervised proceeding known as Title III, a legal mechanism created by Congress to restructure debts by force if negotiations broke down." 
 
 In its filing, Puerto Rico's federal oversight board expressed optimism about the legal wrangling to come. 
 
 In other words, the board remains "hopeful that continued negotiations (including through mediation) will lead to consensual resolutions such that Puerto Rico will once again be able to experience economic and social prosperity after this difficult process is resolved." ||||| The island’s lawyers may view some district courts as more likely to be favorable to them than others. Some creditors fear Puerto Rico will seek to have the case handled in the Southern District of New York. 
 
 Puerto Rico’s governor, Ricardo Rosselló, issued a statement Wednesday aiming to offer some reassurance, even as he sought the federal court’s protection. “We remain committed to holding good-faith negotiations to reach agreements with our creditors,” he said, adding that he hoped the court proceedings would “accelerate the process.” He appeared to be referring to the extraordinary power Puerto Rico will now have in court to unilaterally impose big losses on creditors. 
 
 Some of those creditors are furious. 
 
 “The Commonwealth’s proposal is not a credible starting point for negotiations,” Andrew Rosenberg of Paul, Weiss, Rifkind, Wharton and Garrison, an adviser to the Ad Hoc Group of Puerto Rico General Obligation Bondholders, said in a statement. He said that moving the proceedings to bankruptcy court would put the situation in “free-fall.” 
 
 The creditors got a shock this year when Mr. Rosselló issued a five-year fiscal plan that allowed only about $800 million a year to pay principal and interest on Puerto Rico’s bond debt, far less than the roughly $3.5 billion a year it would cost to make those payments on time. The prospect of losses on that scale prompted some creditors to argue that most of the $800 million was rightfully theirs. 
 
 “That things are starting out in such a highly adversarial way strongly suggests this will be a long and contentious journey for Puerto Rico,” said Matt Fabian, a partner at Municipal Market Analytics who closely tracks activity in the municipal bond market. 
 
 Puerto Rico’s case will be the first ever heard under a federal law for insolvent territories, called Promesa, which was enacted last summer; the Obama administration had warned that a “humanitarian crisis” would ensue if Puerto Rico were not given extraordinary powers to abrogate debt. There is no existing body of court precedent for Promesa, but the island’s creditors — who range from hedge fund managers to mom-and-pop investors — are bracing for a titanic battle.
– Puerto Rico has taken a big step toward a bankruptcy that would be unprecedented in two ways: It would be the first by an American state or territory, and it would be by far the biggest of its kind, dwarfing Detroit's $18 billion restructuring in 2013. Puerto Rico's financial oversight board filed a debt restructuring petition in federal court Wednesday, the day after several creditors sued over bond defaults, reports Reuters. The island territory has been mired in economic crisis for a decade and has seen its population shrink by a tenth over that time as residents move to the mainland US. The New York Times reports that the filing includes $74 billion in debt and $49 billion in pension obligations. NPR describes the process Puerto Rico has entered as a "bankruptcy-like process" tailor-made for the island, with the same underlying principles as Chapter 9 protections. It's not clear how much holders of Puerto Rico government bonds will receive, the Washington Post reports, but a group representing senior bondholders described the filing as a necessary step forward. "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," the group said. The petition was filed under the terms of a Puerto Rico rescue bill lawmakers passed last summer.