Dubai World, flagship of the Emirate and the company behind iconic developments such as The World and Palm Jumeirah, announced a six month standstill and said it will not be able to pay creditors until at least May 2010.
The news has sent shock waves through global markets and credit agencies Moody's Investors Service and Standard & Poor's downgraded the company and other government related firms.
The situation demonstrates the depth of problems in the Dubai property market as Dubai World was one of the key driving factors behind the real estate boom in the Emirate.
The financial woes have long been suspected with property prices falling up to 50% in the last year and analysts warning that Dubai was in for a fall.
An estimated 400 projects worth more than $300 billion have been cancelled, shut down or are on a go slow as developers try to cope with property prices that are still moving downwards.
Many in the real estate industry hoped that the hype put out by the government just might be true.
A year ago the government proudly declared that the Emirate was not badly affected by the global downturn.
It even downplayed the fact that it received a $5 billion bond bail out from the UAE federal government.
Now any illusions that Dubai can weather the economic storm without lasting harm have gone as Dubai World accounts for most of Dubai’s debt which is put at a total of $80 billion.
Unlike neighbouring Abu Dhabi, Dubai cannot rely on oil revenues to bail itself out.
With one of the largest and most prestigious developers in trouble there are concerns that many parts of Dubai will become a giant ghost of a construction site.
And it won’t just be ordinary investors who will be wondering what is going to happen to their money.
A number of celebrities including actor Brad Pitt, footballers David Beckham, Andy Cole, and Michael Owen, have all bought off plan in the Emirate.
It clear that Dubai cannot hide the extent of its problems any more.
While the debts are frozen until at least May 2010, accountants Deloitte will draw up a restructuring plan.
Dubai’s $80 billion debt was borrowed on a short term basis with all of it due to be repaid in the next three years.
