I still don't understand what makes you say this though. I don't think theres any way we could possibly know for certain what the market for a closer will be - or for any player for that matter. Would you have guessed Werth would have been paid what he was paid? A couple years ago would you have expected Francisco Cordero to get 46 million? People have pointed out that teams like the White Sox, Dodgers, and Nationals among a few other teams could be in it for a closer.
Think about it, we had no idea before 2007 that the Red Sox had set their sights in Dice-K years prior. They coveted him and put a number on him and got their man. Unless you're going on something we don't know I don't see how you could no for sure that this is the "worst possible time" to be a closer on the market and how GM's around the league value bullpen arms. We can't know for sure a team like the diamondbacks or even the bluejays might come out of no where. Maybe Papelbon is their Dice-K, the guy they've been watching for a while who they're willing to offer a lot of scratch because they believe he will add something to their team that they're missing to put them over the top. We can't know that isn't going to happen.
The one thing Papelbon has said time and time again is that he wants to set the bar for other closers on the market and that he intends to cash in and deserves to be one of the highest paid at his position.
Teams are gun shy about big contracts? Jason Werth got a huge deal. Adam Dunn got 4/56, Tulowitzski was signed to a 100 million dollar extension. Big contracts are happening and not exclusively from big market teams. For relievers, Soriano did just get 3/35 and he's got a history of arm trouble and not nearly the track record that Papelbon has as a closer.
edit -- clarity