Depending on the expected answer for the Default > Non-Default > Default scenario, the following might be the solution.

WITH cte AS
(
   SELECT *,
         ROW_NUMBER()
             OVER (PARTITION BY Party_Id, Credit_Risk_Status_Type
                   ORDER BY Effective_Timestamp)
             AS rn,
         LAST_VALUE(Credit_Risk_Status_Type)
             OVER (PARTITION BY Party_Id
                   ORDER BY Effective_Timestamp
                   ROWS BETWEEN UNBOUNDED PRECEDING AND UNBOUNDED FOLLOWING)
             AS LastStatus
   FROM #CreditDefaults 
)
SELECT *
FROM cte
WHERE rn = 1
AND Credit_Risk_Status_Type = 'Default'
AND LastStatus <> 'Non-Default'
ORDER BY Party_Id, Effective_Timestamp

The LAST_VALUE() window function is used to identify the latest status value, while ROW_NUMBER() is used to select the earliest row for each status. Filtering for (1) status = 'Default', (2) row number = 1, and (3) latest-status <> 'Non-Default' gives us the desired results.

See this db<>fiddle for a demo with some extra test data.

(Your description and the sample output doesn’t match.)
Based on your description:

SELECT cd.* FROM #CreditDefaults cd
inner join 
(select Party_Id, min(effective_TimeStamp) as earliestDate 
  from #CreditDefaults cd1 
  where not exists (select * from #CreditDefaults cd2
                    where cd1.Party_Id = cd2.Party_Id 
                      and cd2.Credit_Risk_Status_Type = 'Non-Default')
   GROUP BY Party_Id) tmp
   on cd.Party_Id = tmp.Party_Id 
  and cd.Effective_Timestamp = tmp.earliestDate ; 

DBFiddle demo

Or if you really want only the latest not being ‘Non-Default’:

WITH pcreditdefaults as (
    select
        cd.*,
        row_number() over(partition by Party_Id order by Effective_Timestamp) as rn,
        row_number() over(partition by Party_Id order by Effective_Timestamp desc) as rnd
    from #CreditDefaults cd
)
select Party_Id, Party_Data_Source_Code, Credit_Risk_Status_Type_Group, Credit_Risk_Status_Type, Effective_Timestamp
from pcreditdefaults d
where rn = 1
and not exists(
    select 1 from pcreditdefaults d1 
    where d.Party_Id = d1.Party_Id and d1.rnd = 1 
        and d1.Credit_Risk_Status_Type = 'Non-Default'
)
;

SELECT 
  Party_Id
  ,Party_Data_Source_Code
  ,Credit_Risk_Status_Type_Group
  ,ts_max = MAX(Effective_Timestamp)
FROM #CreditDefaults co
WHERE NOT EXISTS( SELECT NULL FROM #CreditDefaults ci
                  WHERE co.Party_Id = ci.Party_Id 
                        AND ci.Credit_Risk_Status_Type = 'Non-Default' )
GROUP BY 
  Party_Id
  ,Party_Data_Source_Code
  ,Credit_Risk_Status_Type_Group