Dubai - Could This be a Game Changer For the Global Economy?

When the market was trading at record highs and people thought we were in for a comfortable landing, Dubai threw a huge and extremely shiny spanner into the mix dune buggy Dubai price.

The immediate cause for alarm was the request for a stoppage of the interest on debts issued from Dubai World - a private, though state-backed, corporation. It could be thought, was a standard corporate failure.

It's not so great. Three things made it particularly crucial. First, property prices in Dubai had already dropped by at least 60% - while the economy clearly was still suffering, many people thought that the burden was already taken away and the Emirate could concentrate its efforts in advancing. It's not so.

There was also an implied state guarantee in the case of the loans that were owed by Dubai World and its subsidiary Nakheel. If Dubai did not back its bonds, it could be construed as a sovereign failure (though Moody's pointed out that there was no explicit guarantee, and in fact it reduced the rating of DW bonds due to this).

Thirdly, how timing was it for the announcement - which came out just prior to the Eid al-Adha holiday, when the markets in the Gulf would be shut. Incomplete information, no traders without liquidity, and a potential default- not the best recipe for a happy investor. A few bears suggest that this could be the start of the real financial crisis.

There are a few voices of reason insisting that the damage is only limited to a couple of bonds, and the possibility that Abu Dhabi will step in as fairy godfather.

I'm guessing that the truth lies somewhere in the middle between these two extremes. To know what's going on , you need to know how Dubai came to the position it's currently.

Dubai isn't a state that's petrodollar-based. It doesn't have a lot of oil - enough to have got started on modernising its economy, however, the oil and gas industry made up only 6% of its GDP in 2006 and probably a good deal less than that now. The plan has been to become the Gulf 'hub'; and it hasn't gone as well and has made Jebel Ali port being one of the top ten container ports worldwide and trade, food, as well as financial service accounting for over 40% of the country's economy.

The growth in real estate was initially due to the services economy. In recent years real estate has risen to the lead; by 2005, the construction and property industries were responsible for 25% of GDP. Following the time that Dubai lifted the bar on foreign buyers purchasing property in 2006, an enormous credit-driven boom in assets began with millions of dollars going into marketing Dubai development for UK and Irish buyers and in promoting the city as a tourist destination.

In a few way, Dubai is very similar to Iceland due to debt-driven price inflation of assets and a small population (fewer than 100,000 Emiratis although the total population is approximately 2m).

There's a big difference. Dubai although acting in numerous aspects as an independent state, belongs to the United Arab Emirates - a somewhat ambiguously constructed federation in where the single largest economy is Abu Dhabi's. That's led to hopes that Abu Dhabi will bail out Dubai - but evidence suggests that if it does, it will make a hefty bargain.

Abu Dhabi has always considered its own country to be the bigger brother in this partnership. It's more conservative both socially and financially. It's not been entirely happy with Dubai outdoing itself economically, or with Dubai's comparatively easygoing lifestyle. Abu Dhabi has said it will back banks - both Emirati as well as foreign owned operating in the Gulf. It hasn't spoken concerning Dubai World. The company hasn't even said any thing that can be read as a blank cheque being written.

There are reports that it could strike an uncompromising bargain in order to control assets such as Emirates airlines and the Dubai World ports business. But equally, it might make a political bargain. In addition, I'm sure Abu Dhabi isn't thrilled with the manner in which the announcement was made - you could think of it as Dubai trying to "bounce" Abu Dhabi into writing them the blank cheque.