Automatically set default password to all posts in a specific category

This should do what you want:

add_filter('save_post', 'wpse_135377_protect_post');
function wpse_135377_protect_post($post_ID) {
    if (in_array(
        'protected_category',
        wp_get_post_categories($post_ID, array('fields' => 'slugs'))
    )) {
        // we have to remove the function
        // as it will be called by `wp_update_post` (=> infinite loop)
        remove_filter('save_post', 'wpse_135377_protect_post');
        wp_update_post(array(
            'ID' => $post_ID,
            'post_password' => '123123',
        ));
        // now we add it again
        add_filter('save_post', 'wpse_135377_protect_post');
    }
} // function wpse_135377_protect_post

There were several problems in your code base:

• there is no post status protected—password protected posts have the post status publish as well (and they have a password);
• you should use the save_post action (as suggested in the below comment and the linked answer);
• the $post object that is passed into the functions (save_post as well as default_content) is not a pointer (reference) so anything you do to the object stays within the function (unless you insert it into the db).

Happy protecting!