The assumption here is that all countries are borrowing in debt that is denominated in their own currency. If that is the case, then the government can print money to repay the bond holders.
There is an effective default scenario that effects foreign bond holders, and that is the situation where the currency in which the bonds are denominated are significantly devalued to the point where the returns are equal to low level recovery rates that might be expected in a corporate default.
I am thinking of the 90% devaluation of the Russian Rouble in 1998 that wrecked Emerging Market bond portfolios across the world and trigger the LTCM crisis. Technically it wasn’t a default, but the USD denominated losses were catastrophic.
I would expect the rating of government bonds to reflect the stability of the currency in which they are denominated.
