What next for debt-burdened Dubai?

One of the biggest events in the Muslim calendar, Eid al-Adha, which began last weekend, is supposed to be a festival of sacrifice. On Wednesday, investors in Dubai were given an early chance to get into the spirit of things. The emirate's government asked creditors of Dubai World, one of three big government-backed conglomerates, to agree to a standstill on repayments until May 30, at the earliest.

The standstill does not apply to Dubai Ports World, which operates one of the biggest container terminals in the world. But it does include the $4.05 billion due on Dec. 14. to holders of an Islamic bond, or sukuk, issued by Nakheel, a developer responsible for the Palm Islands and other spectacular land-reclamation projects.

The announcement left investors feeling wronged and wrong-footed. Only weeks ago, Sheikh Mohammed bin Rashid al-Maktoum, Dubai's ruler, assured investors that the emirate would soon raise the funds to meet "current and future obligations." Either he was not ready to reveal what was afoot, or he did not know. In an autocratic regime like Dubai, bad news acquires an extra coating of sugar with each step it takes up the hierarchy.

Dubai's debts are heavy, amounting to about $80 billion, including the government and the conglomerates it controls. Investors had half-expected Dubai World to seek forbearance from its bankers, asking them to extend their loans. But they felt sure the emirate would make good on publicly traded instruments, and in particular Nakheel's sukuk, rather than suffer further damage to its financial reputation.

The dismay of investors was quickly apparent in the market for credit-default swaps and in the equally active market for gossip.

"Normally, we know what's going on," says one sheikh in Sharjah, another member of the United Arab Emirates. "Now we haven't a clue. This smacks of a complete lack of control."

On Sunday, the United Arab Emirates central bank said it would provide funding to local banks if needed. However, the central bank didn't offer specific support to Dubai World.

Credit-rating agencies quickly downgraded all government-related debt. Whether the standstill counts as a default depends on whether Dubai is asking investors to defer their claims or telling them to. The answer probably depends on how many of Nakheel's bondholders insist on timely repayment on Dec. 14. If push comes to shove, the emirate surely has the means to satisfy many of them. It raised $10 billion from Abu Dhabi, its wealthier neighbor, in February. And hours before it requested a standstill, it said it had raised another $5 billion from two Abu Dhabi banks, although only a portion of that was available immediately.

These bail-out funds flow to the Dubai Financial Support Fund, a committee that is overseeing the restructuring of Dubai's indebted companies. It is described by one banker as a "command-and-control cockpit," imposing some financial discipline on Dubai's government-backed champions.

Dubai sorely lacked such oversight in the run-up to the crash. Indeed, a month ago, bankers worried that the reorganization of "Dubai Inc." still might not go far enough. Some in the emirate seemed tempted to declare victory over their woes, pretend that every balance-sheet was sound, and go back to business as usual.

But the request for extra time suggests the Support Fund is digging in for a longer campaign. In this stiffening of resolve, some see the influence of Abu Dhabi. Rich in oil and conservative in outlook, its rulers have viewed Dubai's penchant for frolic and folly with distaste and occasional envy. It is possible they are now putting their foot down, fearful that if Dubai does not take its share of pain, it will be back for more money in the next downturn.