The First Shoe (Updated)

The Wall Street Journal reports that Puerto Rico is defaulting on its debt:

Puerto Rico’s Government Development Bank doesn’t plan to make most of a $422 million debt payment due Monday, a step that could move the island’s financial crisis to a new level.

“Faced with the inability to meet the demands of our creditors and the needs of our people, I had to make a choice,” Gov. Alejandro Garcia Padilla said in a speech Sunday night, according to an English translation of the remarks. He said making the payment would divert money needed for crucial health and public-safety services.

A law enacted by Puerto Rico’s government in April empowers Mr. Garcia Padilla to suspend debt payments to pay for essential services as the U.S. commonwealth awaits help from Congress. Some of Puerto Rico’s creditors have criticized the law, saying the government won’t commit to necessary financial changes and hasn’t made a good-faith effort at a consensual restructuring.

I don’t see any way that can be construed as a benign development. Puerto Rico’s general obligation bonds are trading at around 65 cents on the dollar. CPS’s are trading at 72 cents. Chicago’s are trading at 96. Is Chicago far behind?

Update

In commenting on the situation in Puerto Rico at RealClearMarkets, Ike Brannon notes:

There are already law firms working on a possible Chapter 9 bankruptcy in Chicago, and Illinois’ enormous pension problems will likely result in it needing to restructure debt in the next few years as well. The recent Chicago Board of Education bond issuance even required specific language that discussed contingencies in a non-existent bankruptcy regime. The likely outcome there–especially in a Clinton Administration, where the cast of characters in Treasury may not change all that much–will be to protect the pensions of current and retired government workers first and foremost and renege on the promises made to the lenders. How could anyone conclude differently?