GHC implements Haskell as a graph reduction machine. Imagine your program as a graph with each value as a node, and lines from it to each value that value depends on. Except, we're lazy, so you really start with just one node -- and to evaluate that node, GHC has to "enter" it and open it up to a function with arguments.
It then replaces the function call with the body of the function, and attempts to reduce it enough to get it into head normal form, etc.
In some, limited cases, the compiler can determine such a loop exists as part of its other control flow analyses, and at that point replaces the looping term with code that throws an appropriate exception. This cannot be done in all cases, of course, but only in some of the more obvious cases, where it falls out naturally from other work the compiler is doing.
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