For many years, Greece was highly indebted, but paid little more for its debt than Germany or France. It seems that investors simply couldn’t imagine that the other member states would allow one of the euro-area countries to default – and they weren’t entirely wrong about that, as we now know.
One reason for this was probably that the international capital rules adopted in the early 1990s allow banks to treat government bonds in their domestic currency as a risk-free investment requiring no capital backing. This applied regardless of how risky financial market investors considered the bonds to be or how bad the fundamentals really were.