Abu Dhabi finally comes to Dubai's aid

Abu Dhabi finally rode to the rescue of its embattled Gulf neighbour yesterday with a $10bn (£6.1bn) lifeline that settled Dubai World's most pressing debts and will keep it running long enough to restructure its debts.

Creditors were braced for Dubai's Nakheel property development fund to default on the $4.1bn sukuk – Islamic bond – that matured yesterday. But stock markets around the world lifted and those in Dubai and Abu Dhabi surged by 10 per cent and 8 per cent respectively on the news that the oil-rich next-door Emirate is stepping in.

Sheikh Ahmed bin Saeed al-Maktoum, the chairman of Dubai's Supreme Fiscal Committee, said: "We are here today to reassure investors, financial and trade creditors, employees, and our citizens that our government will act at all times in accordance with market principles and internationally accepted business practices."

There were shivers through world markets last month when Dubai asked for a six-month standstill on the Nakheel bond, calling into question the financial health of the $80bn-indebted Dubai World holding company and, by proxy, the entire Gulf state.

The request was made on the eve of the Eid religious holiday, leaving creditors in the dark for nearly a week. When Dubai's leader – Sheikh Mohammed al-Maktoum – finally made a statement, he said that $26bn of Dubai World's debts would be restructured but none was guaranteed by the state, as many had assumed.

Abu Dhabi has already put together loans worth some $15bn this year to help over-leveraged Dubai development funds cope with the recession-hit collapse in the city's property market. But it kept Dubai hanging on for more than three weeks before agreeing to provide more.

The biggest damage is to Dubai's image. Jan Randolph, the director of sovereign risk at IHS Global Insight, said: "The worst of the crisis in Dubai is now over but the Dubai development model as a playground for the rich and famous has been found wanting."