Until now, Bermuda has been relatively untouched by the global financial meltdown.

To be sure, major insurers like AIG and XL Capital have struggled, but their impact on the overall Bermuda economy and on public finances has been relatively minor, at least in comparison to what is happening in other countries.

That changed yesterday when Butterfield Bank was forced to turn to Government for a guarantee to enable to it to raise additional capital, having failed to do so on its own.

Government, and therefore the taxpayer, will now be guaranteeing preferred shares in Butterfield to the tune of $200 million, and may end up owning some of those shares too.

In addition, the Government could end up owning four percent of the bank's common stock if it exercises warrants that are being granted in return for the guarantee, making it one of the bank's largest single shareholders.

Although this is not a bailout, these are relatively unchartered waters for Bermuda. There have been Government rescues of companies before, notably of Sea Land Construction in 1995 to enable it to complete construction of Westgate and of the Halmar tourism wholesaler ten years earlier.

But they were small in comparison, although it is true in this case that no public money has been spent yet, and may never be. Nonetheless, the $200 million guarantee will be carried as a liability on Government's books, meaning that the Island's overall indebtedness will now spike to more than $800 million. That makes Finance Minister Paula Cox's decision to raise the debt ceiling to $1 billion this year more comprehensible, and she said in the Budget Statement that it could be needed in the event of a systemic failure in a sector of the economy.

The guarantee to Butterfield does not signal such a failure, but it is a sensible and prudent hedge against the possibility that the local and world economy experiences further deterioration. And no one can say with any certainty that that will not happen.

It is important to note that all four of the Island's banks have more than enough capital to meet their obligations now, and that deposits are safe. But the Bermuda Monetary Authority's stress tests, designed to see how the banks would fare if conditions drastically worsened, showed that Capital G and Butterfield needed more capital. The former, which is much smaller, was able to do it internally, but Butterfield needed help.

That's not surprising, given the state of the world's investment markets, but Butterfield is not entirely an innocent victim in this.

Poor investments, especially in US mortgage vehicles, are haunting it, just as they are many other banks, and as a result, its share price has been battered. On the flip side, Bermuda could not afford to have one of its two major banks collapse, now or in the future. Still, Butterfield is getting out of this quite lightly, and needs to rebuild its reputation quickly. It also needs to move to reduce its obligation to Government as quickly as it can, and no doubt Government will wish the same. Governments do not belong in the banking sector.

However, it is worrying that the public's debt obligations are being added to at a time when they aren't in great shape to begin with.

This newspaper has already commented on the Government's failure to prepare for a rainy day. What is worrying now is this guarantee, while necessary, will further strain public finances. If the global economy worsens, and other institutions are placed at risk, will Bermuda be able to keep them going?