Two weeks ago, I wrote about the debt crisis in Dubai. The markets convulsed on news that Dubai World, the huge state-owned corporation which runs many of Dubai’s buildings and investments, might delay or default on its debt payments.

This week creditors, and markets, were relieved to hear that Abu Dhabi, the richest emirate and heart of the federal government of the United Arab Emirates, would bail out Dubai World to the tune of $10 bn and enable Nakheel PJSC, the real estate subsidiary, to pay back a $4 bn sukuk or Islamic bond.

Just as I predicted, Dubai World was too big to fail. The fallout from a default would have poisoned markets across the region and probably irreparably damaged the U.A.E.’s already tainted reputation. Authorities described the Nakheel sukuk as a linchpin of the ongoing debt negotiations, saying ““The whole capital structure was a web of cross-defaults – the only way to calm this was to pay off the sukuk.”

Anyone who bought the sukuk maturing on December 14 when it hit rock bottom at about 48 cents on the dollar made a tidy sum today as it jumped as high as 109.5 on the dollar. Nakheel was widely expected to enter into bankruptcy.

Dubai has always been the public face of the emirate while Abu Dhabi has always held an outsize portion of the oil revenues and thus, the emirates’ wealth. No doubt there will be a degree of control re-asserted over Dubai, although it’s difficult to say what that will entail – more conservative fiscal, religious, and social policies and priorities seem likely.

The city-state also pledged to push for “transparency, good governance and market principles” and passed a new bankruptcy proceedings law.

For now, it looks like Dubai World’s fat has been pulled from the fire. We’ll see how things develop as more of the debts come due.

Over the past decade, a free-flowing ocean of capital brought unprecedented prosperity – and unfathomable risks – to everyone from Bangladeshi rice farmers to Bear Sterns brokers. The Gulf city-state of Dubai became one of the iconic symbols of globalization’s latest era, with ambitious, even hubristic development projects that challenged gravity and common sense in equal measure.

Now, however, the home of the Burj al-Arab and the Atlantis-like Hydropolis undersea resort may find that the receding tide of global finance has left it high and dry. The emirate owes nearly $80 billion, $50 billion of which will come due over the next 3 years, most of it in 2011 and 2012.  In the positive column is the rising price of petroleum, the original engine of the city’s growth. Investors tend to assume that the oil-rich federal government in Abu Dhabi will back Dubai’s obligations. On the other hand, Dubai’s finances are murky and secretive – local officials rarely speak about them, and foreigners who mention any negative facts to the press have been silenced, deported, or even prosecuted. In fact, Dubai still has no credit rating for its sovereign debt.

More than perhaps any other place in the world, Dubai relies on heavy inflows of foreign direct investment to fuel its enormous boom in property development.  The late Sheikh Rashid bin Saeed al-Maktoum helped funnel the profits from Dubai’s limited oil resources into long-term development in making the city a hub of trade, tourism and finance. This freed Dubai, to some degree, from the fluctuations of energy prices, but exposed the emirate to potentially devastating bubbles and crashes in trade and finance.

In order to cover its looming obligations, Dubai has moved to issue $6.5 billion in dollar- and dirham-denominated bonds, its first such sale since 2007. There are indications that investors may demand as much as 7 times the previous premium for these mid-term bonds, up to 400 basis points over the benchmark. Dubai’s raised $10 billion earlier in the year by selling bonds to the Abu Dhabi central bank.

Dubai still holds value, to be sure. But with the state’s propensity for obscuring what’s on the books, it’s hard to be sure what is safe and what sits on quicksand.  The sovereign wealth fund Istithmar World is freezing new investments as it struggles to deal with its current holdingsof over $25 billion, which is rumored to be leveraged as heavily as 90%. Property values have fallen 40% and could sink by up to 70%, a shattering blow to the foundations of a city built on the dream of eternally appreciating real estate.

Dubai’s prosperity hinges on a sturdy global recovery; even then, it requires sustained confidence that the high-leverage, high-flying model which built the city can continue. With Dubai World laying off almost 12,000 employees this year, it’s clear that the those days may have passed. The city must refocus on the core of its business in trade and finance, and step back from the publicity-grabbing but unsustainable architecture and acquisitions.