This paper studies the Eurozone sovereign debt crisis through the lens of funding liquidity in government bonds. Using newly collected data on repo haircuts from LCH Clearnet Ltd, the paper identifies liquidity shocks with a high-frequency structural VAR, separately from sovereign risk shocks, and shows that reductions in funding liquidity substantially increased yields on peripheral government bonds. To explain these effects, a general equilibrium model with financial frictions reproduces the empirical dynamics of a liquidity shock, capturing the rise in bond returns, the flight-to-liquidity, and the contraction in aggregate activity during the crisis.  […]