Why government credit is different

In short

• Companies borrow to fund assets that generate profits and repay from operating cash flow. Governments borrow to run fiscal policy and provide public goods, and repay from taxes and other revenue (fees, tariffs, sometimes profits of state-owned firms).
• The power to tax all private activity in its territory usually makes the sovereign the lowest-credit-risk issuer in its country. Advanced-economy sovereigns are often treated as default-risk-free; emerging and frontier sovereigns are not.
• Analysts judge both ability to pay and willingness to pay. Willingness matters because of sovereign immunity: investors cannot force a government into bankruptcy or seize its assets the way they can with a company.
• Sovereign distress usually ends in a negotiated restructuring (longer maturities, lower rates), often alongside the IMF. A 'voluntary' exchange that leaves investors under-compensated is still a default in substance.
• Sovereign creditworthiness is assessed with qualitative factors (institutions and policy, fiscal flexibility, monetary effectiveness, economic flexibility, external status) and quantitative factors (fiscal strength, economic growth and stability, external stability).