The problem is that, early in the crisis, the Irish government took the bank debts onto its own books. So it's now in a situation where defaulting on the loans

The problem is that, early in the crisis, the Irish government took the bank debts onto its own books. So it's now in a situation where defaulting on the loans is no longer a matter of a large private institution failing (which is bad enough) but a sovereign government (and Eurozone member) repudiating its obligations.