Couldn't they could just keep their money in a bank account?
At which bank? Any could die tomorrow and never pay back a thing. The German government will rather wreak havoc in the financial sector than admitting defeat itself, and it has the power to decide. Possibly, this gives better chances with the government.
this just means that investors already realize that they will have a loss -- this is just a way to reduce the damage.
This should be the correct explanation.
You can't hold many euros as cash, and putting them onto a bank can mean their immediate destruction in the debt crisis. Euro Forex has crashed already, and will continue that road if they try to escape that way. They don't know where to go. It's a competition who has the least losses.
Given the instability of the EU, one could say that the market values a Euro of book money far below the current value of one Euro. I wouldn't lend money to Germany at 5% interest right now if I could store the value instead. Negative... go figure what that means.