In late 2009, many bankers thought Dubai was heading for a default on the debts built up by government-owned firms. Markets got the jitters as Dubai risked joining Greece, Ireland and Spain in a sovereign financial crisis.

Just over a year later and no-one expects the Dubai government to default. That is partly from a successful slight-of-hand in convincing the markets that the $110bn owed by the Dubai government and companies owned by the government, is actually only $30bn owed by the government directly. The rest of the debt is not a direct government obligation.

In the short term, Dubai has overcome the most significant challenge on the road to recovery

It is also thanks to reaching an agreement on the restructuring of about $25bn of debt held by government-owned corporate Dubai World in under 12 months. An achievement described by one adviser who worked on the debt as “miraculous”. That so much has been achieved so quickly is testament to what can be done when problems are accepted and tackled head on, rather than ignored, which Dubai at first seemed at risk of doing.

The Dubai World deal means some optimism is returning to Dubai’s economy. Contractors are starting to be repaid, a humiliating default has been avoided, and the government’s 2011 budget shows that the deficit is narrowing. Debt restructuring on other corporates continues, but the pace is easier now. Both sides know that now the banks have agreed to one restructuring, they may as well accept the next ones.

The worst is undoubtedly over. The recovery is not guaranteed. The core sectors of Dubai’s economy will grow quickly as the global economy returns to growth and trade and tourism pick up. A recovery in the emirate’s bloated real-estate sector is less assured.

In the short term, Dubai has overcome the most significant challenge on the road to recovery. More needs to be done to avoid 2015, when the rescheduled debt starts to become due, being another crisis year.