Tim Wall

If any more proof were needed of how close the global economy is to the edge of another, deeper crisis, the panic caused by Dubai World's debt repayment freeze provided it in spades last week.

Just days before the flagship holding company of the Arab emirate announced it would call a six-month halt on $59 billion of debt repayments, Dubai had been centre stage at a London investment forum without a cloud in the sky.

But then the Dubai bubble - based, among other things, on speculative real estate projects such as luxury artificial islands - burst with a vengeance as worries surfaced about oil-rich Abu Dhabi's willingness to bail out the emirate.

World stock markets fell immediately, as it became apparent that other defaults could follow. If creditors call in dodgy loans, particularly from emerging economies, a scramble away from risky investments could plunge the global economy back into a prolonged 1930s-style depression, rather than the V-shaped or W-shaped crises economists have been talking about.

Unlike in summer 2008, when many neo-liberal economists supposed that some countries would ‘decouple' from the developing world economic tsunami, this time there are fewer illusions.

The very real threat of sovereign default by Dubai is spreading panic as governments are likely to face tougher demands from creditors.

In the firing line are a slew of Eastern European countries, such as Hungary, Bulgaria and the three Baltic states, which all have foreign debt-to-GDP ratios of higher than 100 per cent. If any of them fails, the effect on Russia's economy would be huge.

And Russia, while not under threat of sovereign default because of its more than $400 billion reserves, is still not immune - as its leading companies owe a combined total of $470 billion, and there is no certainty that the Russian state would bail them out.

In December alone, Russian corporates have to find $20 billion to keep things afloat.

The Dubai debacle probably also kills any chance of the RusAl IPO in Hong Kong rescuing Oleg Deripaska's empire, leaving it once again up to the Russian government to organise another bailout for the oligarch.

Even if Dubai's ruling family, the al-Maktoums, avoids a default by selling off assets and getting a bail out from Abu Dhabi, a bigger bubble has been burst: the idea that a sustainable global recovery is on the horizon.

t.wall@moscownews.ru