The decision by Dubai's government not to rescue Dubai World, a large state-owned company, amid confusion regarding its repayment schedule ensured that global credit markets remained jittery. Moody's has downgraded all six of Dubai's government-related issuers. Investor confidence dropped initially as it became clear that the government was unwilling to step in, and might force the high-profile quasi-sovereign entity to default on its debt.
However, the markets seem to agree that this is largely a Dubai-specific issue; RBC Capital Markets has stated that it expects that the geographic impact will fade: "Events in Dubai do not represent significant systemic risk to emerging markets nor the broader global financial system."
Abu Dhabi's subsequent financial backing has partially eased investors' fears about the sovereign credit risk of other countries with large debt burdens and the validity of implicit guarantees between state and quasi-sovereign entities. But pressure has started to mount on Europe in light of the downgrade of Greece's sovereign debt by Fitch and the revision of Spain's credit outlook by Standard & Poor's.
