Markets have reacted positively to the news that Abu Dhabi provided a $10bn bailout to Dubai World. The Dubai Financial Market jumped more than 10 per cent after the announcement on 14 December, and bankers say the mood was jubilant in regional trading rooms.

After paying off Nakheel’s $3.5bn sukuk (Islamic bond), about $6bn of the funds will be left to pay Dubai World’s contractors and trade creditors.

“The best bit of news is that money is left over to pay off local creditors and grease the wheels of the local economy,” says one banker at a Dubai bank.

Because the money is coming directly from the Abu Dhabi government, and not disguised as a bailout from the federal government, it also shows that Dubai’s wealthiest neighbour is now more engaged with Dubai’s debt problems, according to other bankers.

Nakheel’s ability to repay its $3.5bn sukuk, which matured on 14 December, has long been regarded as a key indicator of Dubai’s financial health. The Dubai government’s statement on 24 November that it was seeking a standstill agreement on $26bn of Dubai World’s debt, including the Nakheel sukuk, caused investor sentiment towards Dubai to crash. The announcement resulted in credit ratings agencies downgrading a raft of UAE businesses as they revised their previous assumptions of state support for troubled companies.

Although Dubai’s most pressing financial obligation has been dealt with, several issues remain. Most importantly, Dubai World still has $16bn of debts to restructure, and it seems that Abu Dhabi has set a clear deadline for that process. The money from Abu Dhabi will also be used to cover interest payments and working capital at Dubai World until 30 April.

“The message is clear: if Dubai World’s creditors have not come up with some sort of settlement by that date, they will be forced into the new insolvency court where a deal can be forced up on them,” says one UAE banker.

However, financiers warn that the positive initial reaction to the $10bn bailout will do little to repair Dubai’s battered reputation in financial markets. One bond trader in London says that, despite this announcement, no Dubai company will be able to come to the capital markets seeking to raise finance without a sovereign guarantee.

He adds that, following developments at Dubai World, it will now be easier for other companies linked to the Dubai government to walk away from debts. The market is still speculating about whether Dubai Holding, the investment vehicle of Dubai Ruler Sheikh Mohammed bin Rashid al-Maktoum, will need to restructure its debts.

Bankers may be celebrating today, but many know all that has been provided is short-term relief to Dubai’s debt problem.