Kocherlakota...The CB has to bail out the government sometimes...there you have it!

Central Bank Independence and Sovereign DefaultNarayana Kocherlakota - President
Federal Reserve Bank of Minneapolis
Wharton Conference
Philadelphia, Pennsylvania
April 1, 2011

exerpt below...

More subtly, regardless of the FA’s solvency, sovereign debt issues can fail simply through a co-ordination failure among investors. If I, as an investor, don’t anticipate that others will buy into the debt issue, I won’t either. In this sense, sovereign debt issues may be susceptible to suboptimal “runs”. The CB can eliminate this possibility by ensuring the nominal promises of the FA whenever the FA is threatened with default.
Thus, I see trade-offs. On the one hand, the CB is known to be willing to intervene to keep the FA solvent, then inflation is necessarily shaped by fiscal considerations and by the short-run incentives of elected officials. We know from many years of theoretical and empirical research that this effect is not a desirable one. On the other hand, if the CB is fully committed to allow the FA to default if necessary, then even optimal debt management by the FA may end up exposing the country to troubling risks.
Let me wrap up. I’ve argued that even if the fiscal authority borrows exclusively in its country’s own currency, the central bank can have a large amount of control over the price level. But the central bank can only achieve that control if it is willing to commit to letting the fiscal authority default. Such a commitment may expose the country to risks of short-term and medium-term output losses. How this trade-off should best be resolved awaits future research. But I suspect that it may be optimal for central banks to guarantee fiscal authority debts in some situations. If so, we again have to think of price level determination as something that is done jointly by the fiscal authority and the central bank — just as Sargent and Wallace taught us 30 years ago.