CROESUS AN INVESTOR'S VIEW:It is now clear that the era of cheap and plentiful credit has ended

NEW DEVELOPMENTS across world financial markets over the past week have been breathtaking.

Some are fundamental in nature and highlight the deep structural change that is taking place in the global financial system.

The decisions being taken by public policymakers and senior executives at large financial institutions are occurring in the context of a financial system under severe stress and a global economy facing into a probable recession.

In the US, a string of recent results from leading banks contained the now-familiar large-scale asset write-offs and write-downs, together with plans to cut dividends and raise large amounts of new capital.

However, the more dramatic news this week emanated from Britain. The Bank of England announced an innovative new facility whereby UK banks could swap some of their illiquid mortgage-backed securities for more liquid government securities.

Around the same time, Britain's largest bank, Royal Bank of Scotland (RBS), announced Europe's biggest ever rights issue to bolster its balance sheet.

Last year, RBS led a group of banks in the ill-timed takeover of Dutch bank ABN Amro. This was one of the factors that caused RBS's balance sheet to become overstretched.

A second factor was RBS's announcement that it would have to make a potential £5.9 billion (€7.4 billion) writedown in the value of toxic assets on its balance sheet, which made a capital-raising exercise inevitable.

RBS is offering 11 new shares for every 18 existing shares at a price of 200p, a 46 per cent discount to the previous day's closing price. RBS also announced plans to raise a further £4 billion from asset disposals.

RBS's core equity ratio of 4 per cent is one of the lowest in Europe, but the asset disposals and rights issue will go a long way in bringing this ratio up to the new target of 6 per cent. This compares with estimated core equity ratios of 5.5 per cent and 5.2 per cent for AIB and Bank of Ireland respectively.

The RBS move probably sets a new benchmark core equity ratio for European banks.

Although the Irish banks' capital ratios are significantly below this, international investors will probably view the current Irish ratios as adequate given that their business mix is less risky than that of RBS.

The Bank of England's Special Liquidity Scheme (SPS) indicates that the UK authorities are addressing the credit squeeze with a new urgency. Under the scheme, UK banks will be able to swap mortgage loans they made before the end of last year for easily saleable short-term government bonds.

Taxpayers are well protected since only high-quality mortgage assets will be swapped and these will be valued at a discount for the purposes of the scheme. It is expected that banks may swap up to £50 billion of mortgage assets although there is no upper limit so that the amount swapped could eventually be larger than this.

The SPS should be effective in ensuring that the British banking system remains liquid, and should prevent another Northern Rock fiasco.

However, it will do little to arrest the tightening of credit terms and the increasing cost of credit in the UK.

Domestically, economists have been reducing forecasts as it becomes increasingly apparent that consumer spending cannot sustain its previous momentum in the face of the deteriorating property market. Any lingering hopes that the property market could recover this year have evaporated as credit becomes more costly and more difficult to access.

Ireland is a small cog in the global economy and international developments will be reflected here.

The era of cheap and plentiful credit has ended.

Irish financial stocks are entering a period of much slower loan growth that could last for several years.

The deterioration in short-term economic prospects also means bad debts will rise over the next couple of years.

Analysts at Irish stockbrokerages have been busy reducing earnings forecasts for Irish financial stocks. Forecasts for 2008 have been pared back modestly but 2009 and 2010 forecasts have been cut back more aggressively.

For investors, the only good news is that analysts take the view that Irish banks will continue to generate sufficient profits to continue funding dividend payouts.