Dubai World may be straw in wind

News that Dubai's hyper-real property boom is coming unstuck has the potential to throw a real spanner in the works of the global recovery.

Dubai World, one of the emirate's three big state investment companies, has requested a six-month freeze on repayments of US$60 billion ($84.6 billion) in debt.

Creditors will have little choice to wear that for fear that playing hard ball would spread the crisis through the rest of Dubai's investment vehicles and into the surrounding Arab states.

Exactly who all of those creditors are and the extent to which they can afford the loss of cashflow is still unclear. US banks are not expected to be greatly exposed but in Europe there has already been panic selling of bank stocks.

The Commonwealth Bank of Australia has also disclosed some exposure without saying how much.

But what's really worrying markets is the extent to which the problems of Dubai World may be the tip of the iceberg (or sand dune). Is Dubai out of cash? What other debts might they be forced to default on?

Markets fear a domino effect if Dubai-based investment firms are forced to pull capital out of Western markets in a hurry or sell off the assets they've spent the last decade buying up around the world.

Dubai is not an oil state with bottomless pockets, it is a kind of playground for its neighbouring oil states and they do have enormous amounts of money sunk in to those futuristic skyscrapers and man-made resort islands which have been inspiring awe in the Western world for the past few years.

The shockwaves from the Dubai World announcement have already hit these shores through the currency markets.

The kiwi dollar dropped sharply. Currency traders are suddenly feeling risk averse again and the kiwi and aussie dollars are among those currencies that are considered a risky play.

Of course a lower dollar is not such a bad thing for exporters and likewise a short sharp shock to global markets might rein some of the exuberance of the past few months, pulling the expectations of investors back in to line with those of economists.

But with the financial nervous system still so fragile, a little shock is a dangerous thing to hope for.

Yesterday Bloomberg reported one Australian currency strategist advising clients to buy aussie dollars now as the Dubai World woes were a storm in a tea cup.

"The issue is over restructuring a relatively small amount of debt at US$60 billion, which according to an August statement by Dubai World, is backed by US$99 billion in assets," wrote Richard Grace, chief currency strategist for Commonwealth Bank.

Anyone who has followed the increasingly desperate announcements of New Zealand finance companies will recognise the folly of counting on historic asset valuations when assessing future risk.

But lets hope he's right.

Next week we will start to see whether this is a containable glitch or something more serious.