The Government of Dubai has asked its banks for a six-month freeze on debt repayments for its corporate arm, Dubai World.
According to the New York Times, Dubai is now struggling to pay off US$59 billion worth of liabilities for its ambitious real estate projects.
Dubai World is run by Sultan Ahmed bin Sulayem, an advisor to Dubai's ruler, Sheik Mohammed bin Rashin al-Maktoum.
The news came as a shock to most of the world, with sharp falls in the stock exchanges in Europe and Asia. In Australia, the share market dropped 2.25 percent at the opening. Markets in the US were, however, closed for the Thanksgiving Holiday.
Meanwhile, the bonds of Dubai World's property developer, Nakheel, dropped sharply and the cost of insuring against a Dubai Government default skyrocketed.
Dubai World is one of the largest holding firms in the emirate. Its affiliates include Nakheel, as well as investment company Istithmar, which has a portfolio of over 50 firms in the financial services, consumer, and industrial and property sectors.
Dubai has appointed accounting firm,Deloitte to manage its restructuring effort.
"As a first step, Dubai World intends to ask all providers of financing to Dubai World and Nakheel to 'standstill' and extend maturities until at least May 30, 2010," a spokesman said.