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Puerto Rico Hit With First of Several Expected Lawsuits From Bondholders

File photo Puerto Rico's Capitol flanked by U.S. and Puerto Rican flags, in San Juan. AP

Bondholders filed to sue Puerto Rico Tuesday in the first legal challenge that hit the U.S. territory after a freeze on litigation that protected it from lawsuits expired amid a deep economic crisis.

A group representing those who bought $16 billion worth of bonds backed by Puerto Rico's sales tax said in the lawsuit that a government plan to cut its $70 billion debt is unconstitutional. The group accused government officials of strong-arming it into what it called "unfair, unjust, and illegally punitive terms."

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The lawsuit is expected to be one of several as bondholders seek to recuperate the millions of dollars they invested in Puerto Rico government bonds. Puerto Rico already faced about a dozen lawsuits before the litigation freeze was implemented as part of a rescue package that U.S. Congress approved last year.

The newest suit comes after the administration of Gov. Ricardo Rossello failed to negotiate any deal with bondholders after the May 1 deadline of the litigation freeze. Puerto Rico has defaulted on $1.3 billion of principal owed since the previous governor declared the $70 billion public debt load unpayable in June 2015.

Puerto Rico Chief of Staff William Villafane told The Associated Press just hours before the freeze expired that the government preferred to reach a deal with bondholders. But he said embracing a bankruptcy-like process could be an option if negotiations fail.

"At least essential services would be guaranteed," he said.

Puerto Rico could soon announce a historic, bankruptcy-like procedure to restructure a portion of its $70 billion debt. By comparison, the U.S. city of Detroit had $9.3 billion of obligations when it filed for bankruptcy in 2013 in the biggest U.S. municipal bankruptcy ever.

A fiscal plan for Puerto Rico sets aside $800 million a year for debt payments, a fraction of the $35 billion due in interest and payments over the next decade.

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