Let’s first talk about the structure of sovereign (country) debt, and how it’s different from bonds issued by a company.

As you may know, the largest market difference between the two is that sovereign debt is far more liquid and often considered much safer than corporate debt. Put simply, trading a hundred million dollars worth of Treasuries is typically as easy a quick phone call with settlement instructions.

Try that with Tesla bonds.

As far as structural difference, corporate bonds are either backed explicitly by specific assets or implicitly by claims on remaining assets of the company. This backing reduces the risk to the creditor (the buyer of the bonds). In contrast, governments issue their so-called risk-free debt with absolutely no explicit or implicit backing at all.

Countries basically rely on their future power to tax as a promise to repay their debt. And they can do this even as they operate (as many emerging and developed countries do) in perpetual deficits. And so, when continued borrowing becomes difficult, when they are unable to pay for the debt they’ve already issued, they can default. And there’s pretty much no recourse for creditors but to accept terms offered by that country for restructuring that debt for partial repayment.