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Puerto聽Rico's financial oversight board on Wednesday filed for a form of bankruptcy protection under last year's federal rescue law known as PROMESA, touching off the biggest bankruptcy in the history of the US municipal debt market.

The move comes a day after several major creditors sued the US territory and its Governor Ricardo Rossello over defaults on the island's $70 billion in bonds.

The request came under Title III of the PROMESA law is an in-court debt restructuring process akin to US bankruptcy protection, as聽Puerto聽Rico聽is barred from traditional bankruptcy because it is a US territory. The case was filed in US District Court in聽Puerto聽Rico.

The process will give聽Puerto聽Rico聽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.

"The governor needed to show that his primary allegiance lies with the citizens of聽Puerto聽Rico, and that was the justification for the filing," said David Tawil, whose fund, Maglan Capital, heldPuerto聽Rico聽GO debt but has since sold it. "I鈥檓 not sure whether bondholders are going to get any better treatment or recovery under this course of action."

The legal proceeding does not mean negotiations toward a consensual restructuring agreement must stop, the governor said in a statement on Wednesday.

"It is my hope that the Government鈥檚 Title III proceedings will accelerate the negotiation process," the governor said in the statement.

Mr. Rossello's fiscal plan for the island, approved by the oversight board in March, forecasts聽Puerto Rico聽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 a restructuring deal have foundered.

In addition to its debt,聽Puerto聽Rico聽is facing a 45 percent poverty rate, a shrinking population, and unemployment more than twice the US average.

Puerto聽Rico聽and its general obligation bondholders, whose $18 billion of debt is backed by the island's constitution, were negotiating until the last minute.

GO holders offered to accept cuts of 10 cents on the dollar, Elias Sanchez, Rossello's liaison to the oversight board, told Reuters on Wednesday.

The government responded with an offer to repay 70 percent of claims through new bonds, and another 20 cents through a "growth" bond, payable only if聽Puerto聽Rico聽surpassed fiscal projections.

The sides could not reach a deal, and GO creditors sued the island on Tuesday.聽