The recent events in Dubai jolted financial markets across the world. There was a shudder of fright as risk aversion took hold and investors headed for safer ground. To some people it came as an exogenous shock, while others were not totally surprised but, nevertheless, preferred to reduce risk exposure until there was more clarity.

There is natural herd-like behaviour when a relatively unexpected event occurs. Everybody heads for the exit until the all-clear signal is given. The "shocking" incident was the request by state-owned Dubai World for a six-month standstill on its debt. Up to the time of the announcement, there was an assumption that, somehow or other, the payments would be made on schedule.

It was known that the emirate was having a tough time dealing with the consequences of the recession and global financial crisis. But it was generally expected that arrangements with oil-rich Abu Dhabi would smooth things over until better times arrived. What became apparent was that the wealthy neighbour's generosity had limits, even though it was known that the fallout from Dubai's problems would affect other members of the United Arab Emirates (UAE).

When the re-scheduling request was announced, the markets treated it as an instance of sovereign default, and there were comparisons with the case of Argentina some years ago. Perceptions of credit quality deteriorated rapidly and the cost to debt-holders of buying protection via default swaps climbed dramatically.

Dubai is obviously suffering from the delayed impact of the global bust after years of profligacy during the boom years. In the good times, money poured in, going into extravagant projects, with few questions asked about risk. Investors were very keen to get in and not miss out on all the action.

Now they are finding out that, as elsewhere, leveraging works wonders when prices keep on rising at a rapid pace and produces very unpleasant consequences when demand evaporates and valuations fall.

Inevitably, if they engage in speculation and poor risk management, investors should not complain if they end up with big losses. And, it shouldn't be the job of authorities to bail them out. This holds true for the US and Europe, as well as the UAE. Except that the developed world has given very poor lessons to developing ones on the matter of economic management. Take a look at the massive funds allocated to bailing out banks, insurance companies and carmakers.

Investors have become spoilt, expecting a bailout when times become really tough and they face major losses. Imagine their surprise when the authorities stepped back from standing full-square behind all the debts of Dubai World. Essentially, they were saying that a full bailout was out of the question and investors would have to take a haircut.

The big state-owned company has a finger in many pies, and it is principally the property wings of the operation that are most affected by the downturn. In the brief global stock-market sell-off that ensued, the worst affected entities were banks and construction companies with significant exposure to the Persian Gulf region. But initial estimates of losses were on the extravagant side, and as the projected figures were revised down and debt restructuring initiatives announced so did bank stocks make a recovery.

A principal issue in Dubai, and indeed the rest of the UAE, is one of governance and transparency. Decision-making in the emirate has always been highly centralised among a small elite group taking its direction from the sheikh, and accurate financial information is scarce. Also, it appears that in recent years the ruler has dispensed with advice from more cautious technocrats, going for big ideas without much regard for inherent risks.

Strictly speaking, the debts run up by Dubai World are not sovereign debts, and therefore the government has no binding obligations to fulfil. But given the nature of governance in the emirate, the dividing line between the ruler's family, the government and state enterprises is an unclear one.

So investors can be forgiven for failing to differentiate between the public and private spheres, and expecting the state to stand behind all the debts. Dubai World's executives were originally appointed by the government and supported in their roles. And, of course, some of the profits of the state-owned enterprise ended up in the coffers of the Sheikh and government.

Investors' suppositions, and previous misleading winks and nods from the government, had led them astray. In the debt restructuring that is currently being considered, creditors will have to accept substantial losses. As a result, the attitude of investors and creditors in the entire Gulf region will be more cautious - at least in the short term - with an impact on markets and the pace of economic development.

The consequences for the world have been relatively minor. After a sharp spike in risk aversion, lasting only a day or two, markets rapidly gained their poise. It became obvious that the problems in Dubai were the consequences of past excesses, having little systemic impact in the present.

As for Dubai, itself, there is an evident need for better governance and transparency. But achieving this is usually a difficult and slow process because the problems are deeply structural. In the short term, there will be some risk aversion related to the clearing up of the property mess. But the emirate has ongoing strengths as a financial and transportation hub in an important region.

It will stage a recovery, proving the doubters wrong. Those who are currently reciting lines from Shelley's sonnet, Ozymandias, will have to wait a very long time.

Iraj Pouyandeh is a strategist and senior portfolio manager at LOM Asset Management. He manages the LOM Global Equity Fund. For more information on LOM Asset Management please visit www.lomam.com