I'm trying to understand this r/explainlikeimfive analogy. I rectified typos, and simplified some names and numbers.
Won't Cal demand his principal back at some time in the future?
Similarly, won't countries' sovereign debts demand their principal?
For example, China holds much US treasuries and US sovereign debt. If China thinks COVID-2019 will cripple the US and wants to park its money else where, won't China demand all of its principal from the US so that it can buy Australia or New Zealand sovereign debt instead?
'Country A owes \$10 to country B, and has agreed to pay 2% interest annually. Call this Debt X.
Country B owes \$15 to country A, and has agreed to pay 1% interest annually. This is Debt Y.
Investor A is willing to purchase Debt X for \$12, because he values the steady rate of return, and believes country A is very likely to pay its debts. He isn't as sure about Debt Y, but he is willing to pay \$16 for it. Investor B thinks that investor A is going to change his mind about Debt Y and value it more highly, so he is willing to pay \$17 for it today.
Debt is traded constantly and it's valued differently. Just because 2 countries owe each other similar amounts of money, doesn't mean the value cancels out in any meaningful way.
Think of debt this way. You and your three brothers all own a house together. Each year you take up a collection of \$1000 a head for \$~4k annual upkeep on the house. One year, a tree falls on the roof, and the house needs another \$4000 bucks. Everyone could just chip in 1k each, but one brother is having a tough year, so instead, you loan the house \$4k, with the expectation that it will pay you 1% interest a year.
Your brothers agree, and over the years, this comes up a few more times. You even use debt to finance installing a new hottub. You now own \$20k in debt from the house, 1 brother owns \$5k, and for some weird reason, your neighbor Cal wants to purchase the debt from you. (He really thinks your household is trustworthy, and wants somewhere to park \$20k for 1% interest).
Now C owns \$20k of debt from your house, so C owns 80% of all your house's debt. Would you say C owns your house now? Well of course not, your house is likely worth many times more what C has claim to. If someone in your house is super worried about the situation, they could take up a collection in the house to buy the debt back from C, but it's not a popular idea, because most people can think of better things to do with their money than pay off C so they don't have to make the small yearly interest payments.