They’re off and racing in the sovereign default stakes, with Dubai, the once-rich Middle East emirate, heading Greece, Latvia, The Ukraine, Estonia, Ireland and Italy as the state most likely to take the unwanted prize of being the first country so go broke this crunch (Iceland’s collapse excepted).

Greece had been a few lengths ahead earlier this week with news of worse-than-reported growth, debt and tax collections, but overnight Dubai caught and passed it with a stunning dash towards the D-line.

Ireland has rising debt, falling revenues and has already had its credit rating cut (as has Greece). But no other country (Iceland excepted again) has stick its hand up and said “halt”, like Dubai appears to have done overnight.

Dubai’s state-controlled Dubai World asked creditors for a six-month “standstill” on its debts, a move the Moody’s and Standard & Poor’s ratings agencies said could mean a condition of  “default’ had been triggered on the billions of dollars of debt owed.

The move came as a complete surprise and now has banks and other finance groups reaching for their lawyers and advisers because it could trigger a default on the group’s $US59 billion of debt, a move that would rival the impact of the collapse of General Motors or AIG on credit market sentiment.

The announcement means the group and the Royal family of Dubai (the al Maktoums) don’t want to, or can’t finance the $US59 billion of debt held by DP World. The move also places in doubt rest of the estimated $US80 billion Dubai is believed to owe bankers and others in the Gulf and elsewhere.

Dubai World owns Nakheel, the state-owned property developer responsible for some of Dubai’s most elaborate  projects — including the Palm Jumeirah and the World Islands, and DP World, which bought the P&O ports operator in 2005. It has a string of other investments and business in and around Dubai.

Dubai World is one of the emirate’s three flagship holding firms, along with Dubai Holding and Investment Corporation of Dubai.

Nakheel flirted with an investment in Australian property group Mirvac, but it went sour after Mirvac lost money and needed to raise capital to stay afloat, Nakheel sold its remaining shares a few months ago. DP World owns the local P&O operations in Australia, which is one of two major portside groups, the other being the struggling Asciano, which owns Patrick.

The shock move also raises questions about the credit worthiness of other Dubai-based businesses and foreign companies involved in the region will also be on suspicion so far as market are concerned. Leighton Holdings, the big Australian contractor (which is 56% controlled by Germany’s Hochtief), has extensive contracts with the region and Dubai. Several have been curtailed or put on hold, but Leighton does have a constriction and contracting joint venture there. It’s main venture is in Al Habtoor Leighton, with a local construction group.

Dubai World’s problems seem related to a $US4 billion outstanding Islamic loan debt falling due on December 14. But the situation remains confused as the Dubai government has, like much of the Muslim world, just started the Aid al-Adha holiday and the UAE national day celebrations, which will see the region shut down for more than a week.

Market suspicions were aroused when the statement requesting the standstill was made public as the country shut down for the holiday. Phones were not answered and it means there will be a week of confusion. Markets hate confusion and a vacuum and will think the worst. In a week  Dubai could be all but bankrupt, if there’s no more news or developments from the government.

The standstill plea came as two wholly owned Abu Dhabi banks subscribed a further $US5 billion for Dubai’s department of finance. That had lifted hopes that Dubai World would get the money to repay the Islamic loan. But the government says the money raised isn’t for the troubled group, but part of the $US20 billion bond issued in February. That bond was 50% purchased by the Central Bank of the United Arab Emirates, which is based in neighbouring Abu Dhabi.

In the statement announcing the standstill request, the Dubai government said:

“The Government of Dubai, acting through the Supreme Fiscal Committee (SFC), has authorised the Dubai Financial Support Fund (DESE) to spearhead the restructure of Dubai World with immediate effect.

“The process has begun with the appointment at the direction of the DFSF of a Chief Restructuring Officer (CRO), Aidan Birkett, Managing Partner, Corporate Finance at Deloitte LLP, to Dubai World. The CRC will work with Dubai World’s executive management team to oversee the restructuring process and ensure the continuity of Dubai World’s operations.

“As a first step, Dubai World intends to ask all providers of financing to Dubai World and Nakheel to ‘standstill’ and extend maturities until at least May 30.”

London reports say that it is not yet clear if the “request” is voluntary — which is a condition that ratings agencies such as  Moody’s and Standard & Poor’s say would determine if the credit event constituted default or not.

Moody’s reacted by slashing ratings on Emaar Properties PJSC, (the UAE’s biggest developer), Jebel Ali Free Zone, an operator of business parks, DIFC Investments and Dubai Holding Commercial Operations Group were all cut to below investment-grade ratings by Moody’s. DP World, the port operator, and Dubai Electricity & Water Authority were lowered to Baa2, two levels above junk.

Bloomberg said S&P, which doesn’t rate Dubai Electricity & Water, lowered the ratings on the other five companies to BBB+ or BBB-, three levels and one level above junk, respectively. S&P and Moody’s said they may cut the ratings further.

The debt “restructuring may be considered a default under our default criteria”, S&P said in a statement.

That puts Dubai two ratings agencies ahead of Greece in the default stakes and the lead is growing.