Is it just a real-estate related problem confined to Dubai?

The shock waves emanating from Dubai World’s attempt to reschedule its debt rocked global equity markets on Thursday. The fear was all the more because Dubai World is state-controlled, which means that effectively it’s the government that is asking for more time to repay.

Is Dubai another canary in the coal mine, just as Iceland was at the beginning of the crisis, or is it just a real-estate related problem confined to Dubai?

It’s true that Dubai’s problems stem from the surreal happenings in real estate there, with the place being home to the world’s tallest tower and the biggest man-made islands. Real estate prices have fallen by around 50% in the sheikhdom and are expected to continue to fall.

At the same time, the debt restructuring is a clear signal that there are still lots of buried mines out there and it’ll be a long time before the world economy will be out of danger.

Moreover, many of the economies and banks in the West continue to be on life support and their capacity to weather shocks is much diminished.

Matters are not helped by the fact that many international banks have lent heavily to Dubai, banks that are still in a vulnerable position and need to raise capital.

But if Dubai was a real estate bubble waiting to burst, other emerging markets, too, are overextended. Analysts have been warning about Eastern Europe, with their high foreign currency borrowings and dependence on exports.

Emerging market stocks have moved up sharply and are priced for perfection. Any disappointments or shocks could send them down. The dollar carry trade, too, can be a double-edged sword—any spike in risk aversion and the dollar will strengthen and leveraged bets on emerging markets will be wound down.

To be sure, Dubai’s problems may be entirely local. But Vietnam, another darling of emerging market investors, is also facing problems. And finally, while Dubai may be facing severe overcapacity in housing, China, the big daddy of all emerging markets, is also facing overcapacity in a host of industries, made worse by huge growth in credit.

In short, the Dubai World shock is a reminder of the substantial risks in today’s markets.