Dubai World’s Announcement Raises The Fear Of A New Wave Of Victims Emerging

While Iceland's transformation from fishing nation to financial powerhouse - and back - became a potent symbol of the banking boom and bust of the past few years, the Middle Eastern emirate of Dubai was where the global property bubble was taken to its glitziest extreme.

Without the oil reserves of many of their neighbours, Dubai's rulers hatched a hubristic plan to turn their city-state in the sand into a glamorous playground for the rich, enthusiastically bankrolled by western investors.

Now, with the state-owned builder of many of Dubai's most extravagant projects struggling to repay its debts, the world's financial markets have been forced to wake up to the idea that they may have declared an end to the turmoil of the credit crunch too soon.

Stock markets have soared over the past eight months as investors shrugged off fears that the near-death experience of the world's financial system when Wall Street bank Lehman Brothers collapsed in October 2008 would lead to a 21st-century great depression. But Dubai's woes this week were a sharp reminder that there may be plenty more unexploded bombs hidden in the world economy. First, Dubai's authorities are not alone - a string of other states, including Greece, Ukraine and Ireland, face severe debt problems in the months and years ahead as they tackle the costs of the worst recession in a generation at the same time as clearing up the debris from a rampant credit boom.

The International Monetary Fund has already stepped in to bail out several struggling states, including Iceland, Hungary and Pakistan, but Dubai World's announcement raised the fear of a new wave of victims emerging.

Second, the economic slump is not over. While many major economies, including the US, Germany and Japan, have come out of recession, recovery has so far been aided by vast emergency infusions of taxpayers' cash. No one is sure what will happen when those life-support measures are removed next year and central banks begin to shut off low-cost lifelines to banks and raise interest rates.

And third, if Dubai World does default, it will send fresh shockwaves through the world's financial system. International banks - including the UK's - have lent Dubai and its firms billions of dollars to fund its glittering glass towers and indoor ski slopes in the desert. The risk that many of those loans may now go sour has reawakened nagging concerns that even after government-backed rescue packages worth trillions of dollars, the worst may not be over for the bombed-out banks. Germany's Bundesbank warned earlier this week that its banks may face a further �0bn in writedowns on bad loans before the crisis is over.

Uncertainty about whether Dubai World would actually be forced to default, and how much of their money lenders would get back, were exacerbated by the fact that financial markets in Dubai were closed for the Muslim festival of Eid al-Adha. To complicate matters further, the debts were taken out as Islamic bonds, known as sukuks, and the rules about what happens if the borrower fails to pay them back are hazy.

Investors hope Dubai will be bailed out by neighbouring Abu Dhabi, the United Arab Emirates capital - though it is not clear what that might mean for the autonomy of Dubai's ruler, Sheikh Mohammed Bin Rashid al-Maktoum, famous for breeding and racing thoroughbred horses, and for his £10bn fortune.

But whether Dubai is the first domino to fall in a new wave of the global financial crisis or, as some commentators argued today, just a small city-state whose struggles have few implications for the rest of the world, its frozen cranes, empty skyscrapers and bankrupt expatriates are a powerful parable of what happens when a property boom gets badly out of control.

Dubai's romantic past as a sleepy fishing and pearling port has all but gone and nowadays the wooden abras that ferry passengers across its famous creek are dwarfed by banks and investment companies. The richest and most populous of the seven states of the United Arab Emirates, it has an economy second in size only to regional giant Saudi Arabia.

Footballers and film stars have sprinkled stardust on its arid landscape, buying up villas on exclusive developments such as the extraordinary Palm Jumeirah, a lagoon of man-made islands surrounded by an azure sea. Owners there include David Beckham and a clutch of Premier League stars, Afghan president Hamid Karzai, Russian oligarchs, many rich Indians and some well-connected Iranians.

Leisure opportunities in the "Paris of the Middle East" include some of the biggest and busiest shopping malls on the planet. Westerners enjoy a far freer lifestyle than elsewhere in the Gulf, though the recent experience of the British couple caught having sex was a reminder that there are still cultural taboos to be observed.

Parts of the city have a distinctly subcontinental feel that recalls the old joke about the UAE: "Emirates stands for English-Managed, Indian-Run, Arabs Taking Enormous Salaries."

In the good years, the cash poured in, spilling over from the oil-rich states of the Middle East, as sky-high oil prices and strong global growth created windfalls for many of its Gulf neighbours, and from the frenzied deal-making in the international financial markets.

The scale of the resulting building boom was extraordinary, sucking in hundreds of thousands of poorly-paid foreign workers and sending property prices in the desert playground sky-high. Long after the sub-prime crisis began in the United States and spread to much of the rest of the world, the emirate responded with its trademark self-confidence - reckless over-confidence to its critics. It was just over a year ago, as the global financial shadows began to lengthen, that Sultan Ahmed Bin Sulayem, the DW chairman, boasted: "Dubai has a vision like no other place on Earth."

The claim came as Nakheel, the DW property arm, unveiled plans to build the world's tallest tower, with more than 200 floors - beating its nearest rival, the existing Burj Dubai tower, still under construction and due to open next January.

Nakheel, represented by a slick international PR team, was quick to brush aside fears that the emirate would be infected by the coming recession, insisting that fundamentals remained sound and that returns from overseas investment funds would perform better than oil revenues.

So instead of retreat, Dubai carried on partying. And some even saw a silver lining in the gathering clouds, predicting that leaner times for Dubai would reduce the number of expatriates and help re-establish a sense of national identity.

"We have been bombarded with the tallest, the best, the largest, for the past few years," said Professor Abdelkhaleq Abdullah of Emirates University. "The novelty has gone."

But over the past year it has become increasingly clear that the party is over: property prices have fallen by 40-50% from 2007-08 highs and are expected to slide by another 20%. Unemployed Indian workers have left in their tens of thousands while stories of expensive new cars abandoned at the airport by bankrupt foreigners have become the stuff of folklore.

Many high-profile celebrities have holiday homes in Dubai. The actors Brad Pitt and Denzel Washington as well as the supermodel Naomi Cambell (below), are all rumoured to own properties on Dubai's super-exclusive Palm Jumeirah, one of the three constructed Palm Islands in the Persian Gulf.

The developer behind the Palm Jumeirah scheme is Nakheel, whose parent company is Dubai World.

Residents saw their investments collapse this year as Dubai's property bubble burst and now they could be fearing their properties will be devalued yet further.

Investors are also concerned that Nakheel will not be able to afford to finish work on Palm Jumeirah and its other projects, which will leave a lot of Dubai resembling a building site.

A number of footballers have invested in the area. David Beckham, Michael Owen, David James and Kieron Dyer have reportedly got homes there. The Chelsea and England player Joe Cole had a villa but he sold his property for about $3.5m in the summer, just before Dubai's property bubble burst.This will also be bad news for a number of UK engineering consultants who are owed money in Dubai. Nelson Ogunshakin, head of the Association of Consulting Engineers (ACE) says UK engineers working in the UAE are owed around £250m.

Banks have also invested heavily in the area. According to the Emirates Bank Association, HSBC has $17bn invested in UAE, Standard Chartered has $7.8bn, Barclays has $3.6bn and has . RBS $2.2bn. Citigroup also has $1.9bn in the UAE whilst BNP Paribas $1.7bn and Lloyds has $1.6bn.