(Bloomberg Gadfly) — When you play chicken, sometimes you get smacked.
So it goes for creditors of Puerto Rico, which just hardened its stance considerably as it seeks to reduce its $74 billion mountain of debt.
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The island moved on Wednesday to start bankruptcy-like proceedings that will most likely foist bigger losses on debt investors than they’ve been willing to accept. This is a big step. This restructuring is poised to be the biggest ever for any U.S. local government. And it could only happen because Congress last year designed a new and relatively untested mechanism called Title III specifically so Puerto Rico could enter court-restructuring proceedings.
Based on the lack of price movement in Puerto Rico’s bonds on Wednesday, it might seem initially as though investors shrugged this step off as just another blip in an incredibly messy and drawn-out negotiation.
But don’t be fooled by that veneer of calm. Investors are clearly becoming more concerned. It won’t take much for these bonds to trade lower in the coming weeks.