Dubai's hopes of becoming a world financial centre are proving to be nothing more than an Ozymandian dream. Yesterday's unexpected decision by Dubai World, the Gulf emirate's largest state-owned conglomerate, to impose a six-month debt standstill has foreign creditors up in arms. Earlier this month, Dubai's ruler Sheikh Mohammed Bin Rashid Al Maktoum publicly pledged his support for the group and its obligations. Investors, perhaps foolishly, took him at his word.

The consequences of the standstill, and possible eventual default, are far-ranging. The repayment of Dubai World's $4bn Nakheel bond was seen as a litmus test for the emirate's ability to deal with the $80bn owed by the sovereign and its state-controlled companies. The emirate's willingness to do this is now in doubt, especially as only an hour earlier it raised $5bn from two state-controlled banks in Abu Dhabi. This was only half what had been expected, but followed $10bn of earlier support from the kingdom's richer neighbour. Foreign creditors are muttering darkly about taking legal action. Credit default swaps on Dubai's sovereign debt have exploded to levels higher even than Iceland's, according to CMA Datavision.

Dubai's huge infrastructure projects and palm-shaped tourist resorts were long ago revealed to have been a boom-time rush built, literally, on foundations of sand. It is possible the debt standstill is a trial balloon floated to gauge investor reaction to a voluntary restructuring of Dubai World's debts. Eventually, the group could be split in two: a “good” Dubai World with all the productive assets, and a “bad” Dubai World with the rest. The confusion ahead of a four-day holiday is such that some conspiracy theorists even believe the move was somehow foisted on Dubai by Abu Dhabi, tightening the purse-strings on the upstart kingdom. If so, the United Arab Emirates will have chopped off its nose to spite its face.