Dubai World, a government controlled investment company, has asked for its debt payments to be delayed until May next year. The company owes somewhere in the region of £35 Bn and has asked the global accountancy group Deloitte to help oversee its financial restructuring. The request also applies to a subsidiary company the property developer Nakheel.

The group were involved in the large and showy Palm Jumeirah project. They also own DP World, which owns the former P&O port operator.The company has been struggling for some time since the credit crunch and is due to repay £3.5 Bn back in December.

The whole Dubai economy has suffered since 2008 but, until now, most people thought that Dubai would be able to meet its repayment obligations. According to the rating agency Standard and Poor’s this announcement may be considered as a debt default. Both Standard and Poor’s and Moodys have downgraded certain Dubai state backed organisations to ‘junk’ status thus dropping them out of the investment grade bracket.

This has sent a few jitters into the market and the FTSE 100 dropped nearly 2% just before the London Stock Exchange was hit by a technical problem at about 11 am. This has sent it into a temporary auction period where trades can still be placed but not executed.

Last year Dubai’s total debt stood at $80 Bn, of which $70 Bn was government debt. It is believed that Dubai’s debt obligations will amount to $13 Bn on 2010 and $19.5 Bn in 2011.

Dubai has though managed to issue $5 Bn in bonds that were fully taken up by two banks controlled the oil rich Abu Dhabi, which is a better signal. But the country may well have to drop its reliance on property development and foreign investment.

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