Who will pay for Dubai's crumbling debt mountain?

That is the key question facing mainly European lenders and bankers, who are anxiously watching as the glittering capital of Gulf exuberance turns to the dust whence it came.

A collapse in property values is driving the Dubai meltdown, which was triggered by the emirate announcing it wanted the “standstill” on the repayment in less than three weeks of a $US4 billion bond held by Nakheel, the development arm of Dubai World, aka “Dubai Inc.”

While Dubai can no doubt call on more bailout funds from its fellow emirate, Abu Dhabi, the murky world of Gulf financing cuts little ice with Western institutions and ratings agencies.

Meanwhile, the only positive news that has emerged is an assurance that Dubai World’s profitable operations, such as its ports management business, are not in danger.

A deeper concern is that Dubai Inc is effectively a sovereign fund, run by the ruling Maktoum family, and its “default” is a signal that even government-backed securities and investments can no longer be guaranteed.

In other developments:

• Dubai World’s global ports operation, DP World, is excluded from the $US60 billion debt restructuring

• Bank stocks have tanked in Canada and Europe, sending Australasian and Asia markets down in Friday trading

• Rating agencies downgrade Dubai-based banks and other entities

• Property consultants are bracing for sale of trophy assets in Dubai and elsewhere

Dubai World, whose slogan is “The sun never sets on Dubai World," has activities spanning real estate, ports and leisure, has $60 billion of debt – making up three-quarters of Dubai’s official debt of $US80 billion, as estimated by Credit Suisse.

DP World runs 49 ports around the world and has $US3.25 billion outstanding bonds. It is majority owned by Dubai World and has its shares listed on the NasdaqDubai. The company is not part of the restructuring plan that has sought to extend debt payments to next May.

"It might be a move to distinguish the solvent from less solvent companies in an attempt to shift the weight away from the less exposed entities," John Sfakianakis, chief economist at Saudi Fransi bank, told Reuters.

Shares in companies in which Gulf investors own big stakes, including the London Stock Exchange, UK grocer J Sainsbury and German carmakers Porsche and Daimler, fell sharpl,  as did most banks, in European markets.

European share indices fell more than 3%, in their biggest one-day drops since April. The US market and those in the Gulf were closed for holidays.

Ratings agency Standard & Poor's placed the ratings of four Dubai-based banks on negative outlook after downgrading several Dubai-related entities along with Moody’s, saying the debt proposal amounts to a default.

Some analysts said Dubai’s problems are mainly self-inflicted and the oil-rich Gulf states, such as Kuwait, Bahrain and Qatar, are unlikely to be greatly affected unless they are heavy lenders.

Most of the burden to keep Dubai afloat will be carried by Abu Dhabi, which will probably force the Maktoums to abandon their debt-laden economic model that depends on heavy real estate investment and inflows of foreign money and labour.

Lenders may reject Dubai’s “standstill” reject proposals, in which case the government could be forced to hold a firesale of its international real estate. These include prime retailers in the West as well real estate projects in Malaysia, Vietnam, Saudi Arabia, Jordan and Russia.

Moody's has estimated Dubai may need to restructure up to $US25 billion of debt, mostly in real estate.

Credit Suisse estimates European banks could have $US40 billion of exposure to Dubai. But it's difficult to assess the full impact as Dubai doesn't publish consolidated data on public-sector debt.

The implications for debt markets is high, and commentators have already raised fears of a collapse in bonds held by countries such Japan, Greece and Ukraine.

Dubai’s efforts, under the Deloitte-advised Financial Support Fund, will come at a heavy cost, particularly as central banks around the world start to withdraw from their stimulus programmes as their domestic economies recover. None is likely to put a bailout of flashy Dubai on their list of priorities.