Recall that in the United States in 2008, the collateral being posted for repo borrowing began to lose value. As such, the firms involved had to post more collateral to borrow the same amount of money, or they ran out of liquidity real fast, which is what happened to the US banking system. The same thing began to happen in Europe. While mortgage-backed securities, the collateral of choice for US borrowers in the US repo markets, were AAA-rated, for European borrowers in London the collateral of choice was AAA-rated European sovereign debt. Just as US borrowers needed a substitute for T-bills and turned to AAA mortgage bonds, so European borrowers had too-few nice, safe German bonds to pledge as collateral since the core banks were busy dumping them for periphery debt. So they began to pledge the periphery debt they had purchased en masse, which was, after all, rated almost the same, a policy that was turbocharged by a EC directive that “established that the bonds of Eurozone sovereigns would be treated equally in repo transactions” in order to build more liquid European markets. By 2008, PIIGS debt was collateralizing 25 percent of all European repo transactions.

Mark Blyth, Austerity, loc. 237