Just when the stock markets were trading near new records and investors were thinking we could be heading for a soft landing, Dune buggy Dubai price threw a huge and extremely shiny spanner into the works.

The immediate cause for concern was the demand for a suspension of interest payments on debt backed through Dubai World - a private company, although it is backed by the state. You might have thought, was a standard corporate bust.

But not quite. Three reasons made it crucial. First, property prices in Dubai had already fallen by at least 60%. Despite the fact that the economy clearly was still in a state of distress, many believed that the burden was already removed and the emirate was able to now spend its efforts in advancing. Apparently not.

Secondly, there was an implicit guarantee by the state in the case of the loans that were owed by Dubai World and its subsidiary Nakheel. If Dubai was not backing its bonds, it could be construed as the sovereign's default (though Moody's pointed out that there was no specific guarantee or guarantee, and in actual fact, it had reduced the rating of DW bonds due to this).

Thirdly, the timing of the news made it clear that the news was announced just prior to the Eid al-Adha holiday, when markets throughout the Gulf will be shut. Incomplete information, no traders in the market, no liquidity, and a possible defaultis not the most ideal recipe for happy investors. Certain bears believe this could be the start of the real financial collapse.

However, there have been a number of "voices of reason" insisting that the damage could be only limited to a couple of bonds and they are also claiming that Abu Dhabi will step in as fairy godfather.

I'm guessing that the truth lies somewhere in the middle between these two extremes. However, to understand what's going on you have to know the reasons behind how Dubai was able to get into the mess it's currently in.

Dubai isn't an oil-rich state. It doesn't have an awful quantity of oil - not enough to have got started in the process of modernising its economy however, the oil and gas industry have contributed only 6% to GDP in 2006, and probably significantly less than this in the present. The plan has been to transform itself into an Gulf hub; and that hasn't worked out well, with Jebel Ali port one of the top ten container ports worldwide and trade, food, as well as financial service accounting for more than 40% of the economy.

Real estate growth was originally caused by the service economy. In recent times the real estate industry has been able to take the driving seat; by 2005, the construction and property industries made up 25% of GDP. After Dubai relaxed a bar for foreigners who wanted to buy property in 2006, a massive credit-driven boom in assets began and millions of dollars were poured to promoting Dubai properties for UK and Irish buyers, and promoting Dubai as a tourist destination.

In a few way, Dubai is very similar to Iceland - debt driven price inflation of assets with a very small population (fewer than 200 000 Emiratis however the population total is around 2 million).

However, there's a major difference. Dubai, though acting in several different ways to be a sovereign state remains part of United Arab Emirates - a somewhat ambiguously constructed federation in where the single largest economy is Abu Dhabi's. There is a rumor that Abu Dhabi will bail out Dubai but evidence suggests that if it does, it will negotiate a very hard bargain.

Abu Dhabi has always considered as the bigger brother in this partnership. It's more conservative both socially as well as financially. It hasn't been completely happy with Dubai growing its economy - and also with Dubai's generally relaxed lifestyle choices. Abu Dhabi has said it will back banks - both Emirati and foreign owned that operate within the Gulf. It hasn't spoken regarding Dubai World. And it certainly hasn't said something that might be understood as the writing of a blank check.

There are reports that it may strike an aggressive bargain, seeking to take control of assets like Emirates airlines as well as Dubai World ports. Dubai World ports business. In addition, it may make a political bargain. Furthermore, I'm guessing that Abu Dhabi isn't thrilled about the way the announcement was made - you might take it as Dubai trying to 'bounce' Abu Dhabi into writing them the blank cheque.