THanks - I have been doing some research on Dubai and below is what I have learned. This is longer than normal so some may just want to ignore it. Note the comment within about Goldman shorting the EURO last week as if it knew all along this was coming.....

Different ruling families rule the different emirates within the UAE. Abu Dabi has already been helping out Dubai - but it's not like a bailout - the money has to be paid back with interest like a regular loan. Essentially Dubai has been borrowing to pay debt already. There is a lot of political tension between the different Emirates - especially because Dubai has gone off on it's own and has been trying to build itself into atonomy, in the region. Not all are in agreement with that - but especailly now with it's debt problems. As long as it was happening it was accepted - but now the question for the region is - what will Dubai be now? Much of the big money that came into Dubai during the boom has left. It was a huge debt bubble - now gone bust. From what I understand this is only the beginning of this debacle. They obviously timed the news to have the least impact in the beginning - and in Asia they thought it was nothing for hours at first - until more news came out later. But it's being said that there is more to come...

Lots of questions and political pressure.- so who knows?

It may well be that the Fed knew this was coming - probably. Also - I was looking through Goldman Sachs updated holdings last week, that were posted at istockanalyst blog site - and I noticed that Goldman Sachs had gone short the Euro. I wonder if they knew...

I think there are 6 emirates in the UAE - Abu Dhabi has oil, the other 5 do not. Dubai's major industry was pearly fishing until recently. Also recall that Abu Dhabi and Dubai were literally invading each other on camels 70 years ago. Very tribal.

Dubai is essentially a tourist city built to house 5mm people or so - in 6 years (with a real average population of 500k). They have attracted banking and media there since its an easy port of call in the Middle East to set up shop. The laws are relatively easy, its a nice place to live (a GS banker can bring his/her family there to live happily). Transit is easy. But make no mistake, every lender knew Dubai was a bubble. Any idiot driving around could see it was a bubble. Bankers will be the first to tell you don't bother to raise capital, because no one other than the Khartoums have any money.

Still at the peak, housing cost what it cost in NYC. And development? There are no labour laws, few permitting costs (other than the royal family tax). Indonesian, Indian and Phillipine labor working for $2/day, with minimal regard for safety (other emirates are home to huge cities of migrant workers). So a large development cost is very low and sales were very high. Banks all smelled a bubble and priced accordingly. But 80bn in loans is all localized to Dubai - there is negligible contagion risk to the rest of the Middle East (maybe Oman). And given the cheap development cost, 80bn can create some mammoth projects with virtually free labor.

I agree with the blip comment. Other than to slow lending somewhat, I don't see much risk. Abu Dhabi will bail them out after some negotiation. Banks are familiar with all of this, and likely are not surprised at the outcome.

The problems is that Abu Dhabi has completed its due diligence of Dubai and decided it neighbour’s assets aren’t worth the paper they’re written on. After initially giving Dubai $10 billion, the brash emirates was expecting another $10 billion – it got only half that amount.

Dubai has been trailblazing; setting the example for it neighbours, trying to diversify its economy from exposure to oil; and it was doing that by buying up companies around the world and hoping falling oil revenue would be replaced by profits from these business.

The problem is a global recession has meant profits have declined, assets aren’t worth the inflated prices they paid during the boom years. The strategy of cheap money, remortgaging that caught home owners out, has trapped Dubai.

Creditors will be praying that they get something back from their investments and reluctantly will go along with the Dubai’s request for a standstill on debt repayment. With property prices declining more than 50 percent, Dubai World’s property developer Nakeel is looking like a basket case.

The sheikdom, ruled by Sheikh Mohammed Bin Rashid Al Maktoum, borrowed 80 billion dollars from international investors to fuel the boom. But what is unclear is what local banks in the Gulf Cooperation Council loaned to Dubai. It all will come out in the wash.

Dubai is on its own for now until Abu Dhabi steps in but that won’t happen until it see clarity in Dubai’s financial position. Dubai needs to keep diversifying but at some point in the next decade the oil is going to run out.

The model of buying businesses overseas is not working out it will have to consider imposing a direct income tax on the people that work there. It’s an unpalatable thought but it has to be done. How else will it run its government institutions, replace roads, build more track for its metro to run on?

At that stage expect an exodus of expats. What Dubai needs is to rethink its dependence on foreign workers. That’s called sustainable growth. In its efforts to mimic the city states of Singapore and Hong Kong the one key ingredient it forgot was the local population. Singapore has a population of almost 4 million indigenous people, and on its door step, in Malaysia, it has all the cheep labour it needs to keep its industry ticking.

Fault lines in the plan for a single currency are emerging, Dubai’s neighbours – Abu Dhabi, Qatar, Kuwait and Saudi Arabia – have more than enough oil and gas to fund their growth this century. Where as Oman and Bahrain are in a sinking ship! Abu Dhabi will carry Dubai and the other emirates into the single currency despite its dispute with the Saudi’s over where the central bank should be based.

But the question is at what price will Abu Dhabi carry its neighbour?