Here's the risk everyone is underestimating: Trader

As investors obsess over every headline from Greece, it's the debt crisis in Puerto Rico that could actually pose a greater risk to U.S. stocks, says trader Kathy Lien of BK Asset Management.

Lien points out that U.S. companies have little direct exposure to Greece, meaning that if the risks remain mostly contained to the nation, broader markets should hold up just fine. However, the situation is very different when it comes to Puerto Rico.

"A lot of U.S. funds are exposed to Puerto Rican debt," Lien said. "If they were to miss their payments, that would lead to write-downs and explicit losses and portfolio readjustments."

The worry is that selling could beget further selling, putting a whole range of assets in jeopardy of losses.

Puerto Rico's governor, Alejandro García Padilla, declared over the weekend that the territory would not be able to pay back the huge amount of debt that it holds, and may not be able to make interest payments. On Wednesday, the situation began to look a bit less dire, with the Puerto Rico Electric Power Authority announcing that it has paid back all of its principal and interest due on its bonds, with the help of some short-term bridge loans.

"The risks have been mitigated," Lien said Wednesday. "But it's still a developing situation, so everyone is watching it closely."

Read More Major Puerto Rico investor warns it stands ready to defend bonds

A man reads a newspaper with a Spanish headline that reads, 'More sacrifices,' a day after the speech by Puerto Rican Gov. Alejandro Garcia Padilla regarding the government's debt on June 30, 2015, in San Juan.
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A man reads a newspaper with a Spanish headline that reads, 'More sacrifices,' a day after the speech by Puerto Rican Gov. Alejandro Garcia Padilla regarding the government's debt on June 30, 2015, in San Juan.

While Puerto Rican debt has certainly been popular among municipal bond fund managers, thanks to a chase for yield, favorable tax status and strong legal protections against default, Societe Generale economist Aneta Markowska wrote in a Tuesday afternoon note that the risks may be overstated.

"The municipal market is less prone to widespread contagion effects than other asset classes," Markowska wrote. "First, the $3.7tn municipal bond market is not homogenous, with many bonds backed by specific projects or linked to uncorrelated revenue streams. Second, municipal securities are held primarily by individual investors, either directly or via mutual funds. The banking sector's exposure is less than $500bn, with insurance companies holding roughly the same amount."

Finally, as Markowska further notes, a Puerto Rican default wouldn't exactly come as a massive shock.

Even ahead of the most recent news, Puerto Rican debt had been rated CCC+ by S&P, indicating the bonds were considered substantially risky.

Read MoreInvestors scramble to avoid Puerto Rico losses

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