As the words "default'' and "Ireland'' swirled around the bond market again last week, propelled by some excitable media comment, it was a case of holding your nerve at the Department of Finance, where officials have not dealt with a crisis on this scale ever before.

These officials who reached their elevated positions during the boom years must be glad of some relief as everyone is happy to get distracted by the Anglo Irish contracts for difference (CFD) furore, which involves €300m, compared to the €450bn of liabilities these officials have decided to guarantee on an irrevocable basis since late September.

The traumatic events of the last six months are one thing, but now gloomy US economists like Nouriel Roubini, the so-called Dr Doom who predicted the global credit crisis, is questioning whether even state guarantees can save some US and European banks. Let's hope his prediction that a sovereign-backed bank could "crack'' is the product of his uniquely melancholy mind.

Outside the department at least two institutions, possibly three, could soon be looking for fresh capital. Irish Nationwide publicly says it can float along using its cash pile to mop up bad debt losses, but few in the market accept this. EBS and Irish Life & Permanent (IL&P) seem to be taking an age to tie up a merger deal, but could soon request injections of fresh capital too – almost 40% of IL&P property loans are to buy-to-let investors for instance.

The government in an extraordinarily risky gambit has decided not only to guarantee every single major institution in Irish banking, but to also provide, in blank cheque format, for their future funding needs, whatever they may be. The other option of mothballing institutions and running them down in an orderly manner has been cast aside, at least publicly.

Looking at these decisions from an outsider's perspective, the obvious question was asked again last week: why not let the smaller more fragile institutions go? The government is now finally acknowledging the ghost of Lehman Brothers haunts its every move. All seven "orphans'' must be protected, the government suggests, or Ireland could have its own version of Lehman.

This is, of course, problematic, because nobody ultimately knows what would happen tomorrow if the government let an Irish Nationwide or an EBS go. How would the bondholders in these banks react at getting no money back or say 50 cent in the euro? Not very well obviously, but would they blackball the government entirely when it goes to raise fresh borrowings later this year?

It's reasonable to suggest that Irish Nationwide in particular, which has relatively modest bond debts, is not systemically important and could be allowed to fold without hurting the government's already dented international credit worthiness. But the government is not going to test the theory.

Ultimately the government has decided to shape its entire policy around pleasing the bond market, and among those sacrificed are shareholders (Anglo Irish Bank nationalised, assessor appointed) and taxpayers (use of the National Pension Reserve Fund in recapitalisation plan).

The government's deep-seated fear of falling out with bondholders is such that it personally re-assured holders of Anglo's perpetual hybrid bonds in recent weeks, telling the holders they will get their coupon payments. If only Anglo shareholders were getting calls like that and could have their dividend payments guaranteed. Same for holders of AIB or Bank of Ireland shares.

The government is living in fear of losing access to the capital markets for its own borrowings and not paying out to bondholders, senior or junior, is not an option apparently. This policy is perfectly understandable. But unemployment is climbing fast, the level of capital needed to help banks pay the bondholders is accelerating and the pension fund is diminishing. The policy of keeping the bondholders sweet makes financial sense, but in time it may not make political sense.