Isn't the real underlying risk here concentration, as opposed to diversification?

If you have unlimited capital and time horizon, because you're a nation with the power to tax and print money, then you can keep this game going for a long time.

The only thing that mandates it stops are if (a) too many of your loans are correlated with the same thing that crashes (e.g. energy, tulips, AI, etc) or (b) too many of your loans are tied together in a single entity (either because it combined multiple smaller entities or because it tied itself into all their financial arrangements).