The announcement wasn’t entirely unexpected, however, and many traders and analysts believe global markets are prepared to digest the news calmly once some perspective is applied.

“I believe people did see this coming and I think come Monday it will level out a bit. Already, commodities crushed over night have come back,” said Kevin Kerr, a commodities analyst with Kerr Trading International.

In the U.S., the Dow Jones Industrial average was down as much as 230 points early Friday, but recovered about 80 points to end the session only154 points lower.

Late Wednesday, Dubai sought to defer for at least six months at least some of $60 billion owed to creditors by Dubai World, the emirate’s chief investment arm. Investors are clearly worried that a default by a government investment company in Dubai could have a ripple effect in global markets, one that could thwart the fledgling recovery from the worst financial crisis in decades.

But Kerr said doubts have existed for years toward what he described as Dubai’s “excessive overbuilding” and an apparent “if we build it they will come” attitude on the part of the Middle Eastern emirate’s leaders.

Kerr said he expects the government of Dubai to intervene and prevent a default of the debt.

That seems to be the case. Late Thursday, Sheikh Ahmed bin Saeed Al Maktoum, the chairman of Dubai’s Supreme Fiscal Committee, stressed that the announcement was “carefully planned” and aimed at taking decisive action.

“Ahmed’s statement, issued late Thursday, came a day after the Dubai government announced a restructuring of Dubai World and said it would ask creditors to delay debt repayment until at least May. The announcement came Wednesday, on the eve of a three-day Islamic holiday, apparently aimed at blunting the impact of the move in the region.

Our intervention in Dubai World was carefully planned,” Ahmed said in the statement. “The government is spearheading the restructuring of this commercial operation in the full knowledge of how the markets would react.”

Still, the initial announcement raised fears that if an investment entity in an oil rich country like Dubai is having trouble paying it debts, it could happen anywhere, and world markets responded accordingly.

Oil prices dropped near $74 a barrel in Asia on Friday as investors curtailed their risky bets on commodities amid uncertainty over the extent of Dubai’s financial woes. And Asian stocks slumped for a second day. European stock markets appeared to be stabilizing, meanwhile, after a heavy sell-off a day earlier that saw bank shares take a pummeling over possible exposure to Dubai debt.

Tom Kloza, chief oil analyst at Oil Price Information Service, explained the short-term fallout: “It’s not Dubai, it’s Dubai’s impact on the U.S. dollar,” he said.

On Thursday and in early trading Friday, investors feared that European banks which lent money to Dubai World might be on the hook for billions of dollars. That combined with fears that “there are other ‘Dubai’s’ possibly out there” led investors who had recently embraced riskier investment to dump those positions, according to Kloza.
Consequently, the dollar jumped and crude oil fell by more than $5 a barrel.

There’s “still plenty of worry, but the panic for now has been arrested,” said Kloza. “No one was really selling oil because of Dubai — they were selling oil because they had long commodities/short dollar positions and were getting hammered.”

Other analysts noted that the situation in Dubai had similarities to the events in Thailand in 1997 that led to the Asian financial crisis.

“Dubai was a carbon copy of Thailand’s disastrous foray as an ‘international financial center’ in the 1990s,” said Paul Schulte with Nomura Securities in Hong Kong in a note. “Happily, the U.A.E. has oil. Thailand did not.”

The big question is whether Dubai’s oil-rich sister kingdom Abu Dhabi will come to the rescue of Dubai.

Both kingdoms are part of the United Arab Emirates, a nation comprised of seven closely-linked city-states. Sources close to the Abu Dhabi’s government told Dow Jones Newswires that it is unlikely that Abu Dhabi would allow Dubai to default on its debt as it would damage the reputation of the U.A.E. internationally and economically.

Worries about bad debt remain fresh in investors’ minds after the collapse of the U.S. brokerage Lehman Brothers in September last year pushed the world overnight deeper into recession as banks halted lending on fears of a domino effect of bad loans.

Investors are being forced to ask whether the troubles in Dubai will usher in a new period of financial instability and put in danger an eight-month rally in the stock market.

At the very least, it will lead U.S. fiscal leaders to continue their policies of low interest rates and “easy money” said Axel Merk, manager of the $400 million Merk Hard Currency Fund and author of the recently published book “Sustainable Wealth”.