ABSTRACT
This chapter explores the links between the systemic shift to market-based finance and states’ fiscal policy constraints. We draw on the literature on ‘financialization’ to introduce the concept of the ‘collateral motive’ – investors’ demand for government bonds to mobilize as collateral in secured funding markets – and connect it to the shift to transnational, market-based, collateralintensive banking. The resulting interdependence between banks and states has played a pivotal role in fiscal policy convergence around austerity. This policy outcome cannot be fully understood without analysing the processes through which impatient collateral management ignited a run on sovereign bond markets. Sudden stops left Eurozone governments as the only actors who could attempt to stabilize sovereign debt markets via austerity, at least until Mario Draghi promised to do whatever it takes.
