David Prosser: Dubai slides further into financial crisis

Outlook All is not well in Dubai, once a gleaming advertisement for the global economic boom. Dubai World, the state-owned conglomerate that includes the property developer Nakheel (responsible for the Palm Jumeirah) and DP World (the buyer of P&O's ports business), wants creditors to give it a six-month standstill on its $4bn of debt. Yesterday's announcement of that request sent much of the Middle East into a panic, with the cost of insuring against Dubai defaulting on its debts rising by a third almost immediately.

Dubai is sliding into financial meltdown even more quickly than its property boom took off, and is increasingly dependent on its wealthier neighbours in Abu Dhabi for support. It managed to sell $5bn of bonds to two state-controlled Abu Dhabi banks yesterday, but there seems to be little private sector appetite for Dubai debt, which the credit ratings agencies estimate adds up to at least $80bn.

Indeed, yesterday's bond issue was part of a $20bn issuance programme. There has been little detail of what has happened to the proceeds of the first $10bn raised and no explanation of why yesterday's bond sale, which was originally supposed to raise $10bn, managed only half that. To make matters worse, a political struggle at the highest levels of Dubai's ruling elite has seen sackings of some of the emirate's key financial figures and growing uncertainty.

Unlike Abu Dhabi and its other rival, Qatar, Dubai does not have massive oil reserves on which to fall back now that the property and financial cycles are in a downswing. Never mind the housing boom and bust seen in countries such as Britain, Dubai is rapidly turning into the perfect case study of what happens when a speculative asset price bubble suddenly pops.