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San Juan, the capital of Puerto Rico

The US territory has however managed to buy itself some time to reach a deal with major creditors, who have agreed to 30 days of extended talks and say they will not pursue any legal action in the meantime.

Puerto Rico’s governor Alejandro Garcia Padilla announced what he described as the “painful” decision to suspend payments on debt owed by the country’s Government Development Bank in a televised address on Sunday evening.

He explained that Puerto Rico could not repay the bonds without cutting basic public services including schools and hospitals.

The GDB will instead pay $22m in interest on the debts and had already reached a deal to restructure $30m, leaving the bank still hundreds of millions of dollars short.

While the bank said the agreement reached with major creditors marks a “vital first step” in establishing a framework to restructure the debt in full, it leaves the country vulnerable to legal action from smaller creditors.

A full restructuring agreement would require the involvement of all of the GDB’s creditors as well as legislation from the US Congress, as Puerto Rico is an American territory.

Puerto Rico is also scheduled to pay a further $1.9bn in July and holds overall public debt of more than $70bn. Garcia Padilla has stated the country will not be able to pay.

In his speech on Sunday, Garcia Padilla blamed the default on congressional inaction. As a US territory, the island is not qualified to file for bankruptcy protection.

A plan to give Puerto Rico the power to restructure its debts was due to be settled at the end of March, but it has not yet been passed. In the meantime Puerto Rico could face a longwinded default process.

As well as high levels of public debt, the country has a 45% poverty rate and shrinking population as its citizens leave for the mainland.

The country’s major creditors, known as the Ad Hoc Group, hold roughly $935m of GDB’s $4bn bond debts. They are thought to have been owed about $120m of the total due on Monday.

A propsoed framework for restructuring would see them recoup about 47% of what they are owed in a two-step debt exchange programme.

In a statement, GDB president Melba Acosta Febo emphasised that the process will be “complicated”, requiring every creditor to participate, and stressed the need for help from Washington.

“In the absence of federal legislation that gives Puerto Rico the tools it needs, the island will be condemned to a quagmire of economic stagnation with no relief, for which both 3.5 million American citizens and our creditors will bear the consequences.”