Today I noticed that although I removed the membaloon it didn't stick (possibly 
due to panic not syncing the file).
I removed once again membaloon and started the guest with little bit better 
results.
The system does not freeze immediately, but it leaves a lot of "oopses" in the 
syslog/dmesg.
I am attaching these "oopses".

The highlight of the "oopses" is "BUG: unable to handle kernel paging
request at".

I am going to try kvm in NAT mode (btw how do I do that?) and see if
this is happening still.

** Attachment added: "messages"
   
https://bugs.launchpad.net/ubuntu/+source/qemu-kvm/+bug/776936/+attachment/2124149/+files/messages

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https://bugs.launchpad.net/bugs/776936

Title:
  Running KVM guest causes kernel panic on host

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