There are those who are saying that the Dubai debt crisis that recently shook world markets has been contained. In fact they point to the swift return of stability and increase in global stock market prices as evidence.

But you might want to ask some top executives at big banks with exposure to highly indebted corporations and governments if they are breathing easier. They are just beginning to recover from the financial meltdown of 2008 and you can be sure they are preparing contingency plans in case the Dubai crisis was not an isolated incident.

“For those who think that lessons of the past two years have already been forgotten, watching the market shake off the Dubai debris so quickly may be a harbinger of bad things to come,” wrote Michael Kahn in Barron’s.

Most financial advisors are telling their investors not to retreat from allocating to the hot emerging markets, rather just be selective. That’s probably good advice for now. But as the media around the globe is reporting countries in all regions have been on a borrowing binge and the bills will soon fall due. Without getting into the sobering details, countries including Russia, Greece, Latvia, Hungary, Ireland and others face mounting debt.  Even developed countries like Japan, Germany, Britain and the U.S. have been borrowing heavily to finance stimulus and other projects.

It is not probable that these emerging countries will default on government debts in the immediate future since the International Monetary Fund and rich nations are likely to come to their assistance. The big problem is that there are no similar avenues of rescue for companies within these countries who also have large debt exposure.

“I see very good reason to be worried that at some point in 2010 we are going to see more cases of ring-fencing because governments realize they can’t afford to guarantee the debts of these companies,” comments Pierre Cailleteau, managing director of the global sovereign risk group of Moody’s in the New York Times. According to some estimates as much as $200 billion of corporate debt is coming due this year or next.

Will the Stock Market Reverse Course?

Most analysts believe that the Dubai crisis will not derail the market, at least for now but they add that the recovery is not very strong to be able to withstand such shocks. “At this point, global financial markets remain quite fragile, a fact that was exemplified in the steep stock market declines following the announcement about Dubai's debt restructuring. While the size of the debt restructuring is relatively modest, the move did cause significant investor unease. We do not believe this event will serve as any sort of catalyst that could end the cyclical bull market, but it is an important reminder that deflation concerns and debt problems continue to exist,” says Bob Doll, chief investment officer and vice chairman of BlackRock.

Keep in mind that the events in Dubai do not clearly resemble October 2008, when it was immediately obvious that a full-blown crisis had erupted. But note that the 2008 financial meltdown occurred over many months as detailed in the recent bestseller, Too Big to Fail  by Andrew  Sorkin.  Not many financial crises break in one day or one week. More typically, they build and spread over weeks and months. That could still be the case with Dubai.

As Nils Pratley recently wrote in the Guardian, “We have learned not to take at face value assurances that any financial crisis is small and contained. Remember that in 2007 HSBC sounded the alarm about sub-prime losses in the US a full six months before the rest of the industry caught up. Even in the summer of 2007, when Bear Stearns lost a couple of billion dollars in two hedge funds, few believed contagion was on the cards.”