Midnight came and went with no news of a debt deal in Puerto Rico, and no extension of a stay on creditor enforcement under PROMESA. It sure looks like we are careening into an actual sovereign-ish bankruptcy-ish filing under Title III of the law.

As an admittedly distant observer of Puerto Rico's debt crisis, I do not find this turn of events terribly surprising. This is probably because I cannot shake the conviction that Puerto Rico's debt restructuring hinges on resolving its wildly muddled inter-creditor priorities–and that PROMESA is a giant big punt on that score. The law pays sanctimonious lip service to "respecting the relative lawful priorities" of Puerto Rico's debt, but fails to resolve any of the burning questions about what those lawful priorities might be. Almost a year into PROMESA rule, there is still no telling whether sales tax revenue bonds (Cofinas) or General Obligation (GO) bonds, which enjoy Constitutional priority, come out on top. Curiously, while the Cofina bond holder representatives appeared to welcome a bankruptcy filing, GO bond holders complained in public; however, their bonds still rose on the news that Title III was nigh.

The price movements just might reflect collective wisdom that a statutory restructuring is inevitable, and we might as well get on with it. Better yet, maybe the courts will finally sort out the priority thing. My hunch is that it would be better for the Congress or the courts to address priorities head on than for Puerto Rico to exempt some subset of its bonds from haircuts ad hoc, in hope of creating a privileged contract it could then use to access the capital markets. Sovereigns tried to anoint the Brady Bonds and later the eurobonds as a privileged class in the 1990s, with the result that all the creditors piled into the bonds, and the bonds became too big to spare the next time.