City's foreign banks lost pounds 2.5bn in turmoil

FOREIGN BANKS and securities dealers based in London racked up losses totalling pounds 2.5bn following autumn's turmoil in the financial markets, according to official figures released yesterday, writes Lea Paterson.

The Russian default, the near-collapse of the Long-Term Capital Management hedge fund and merger-related restructuring costs all contributed to heavy third-quarter losses, the Office for National Statistics said.

The figures revealed that the extreme market volatility had caused heavy losses on interest-rate swaps. Total third-quarter losses on these complex financial instruments totalled pounds 1.5bn.

The bank losses had the perverse effect of substantially improving the UK's current account, which posted a third-quarter surplus of pounds 2.3bn, the second highest on record. This is because losses made in the UK by foreign-owned banks are repatriated overseas. Analysts speculated that the UK could now post a current account surplus for 1998.

The losses masked underlying trends in the current account, where the goods trade deficit widened but trade in services held up.

The third-quarter trade deficit on goods totalled pounds 5.2bn, the highest for eight years. The trade surplus on services, however, came in at a record pounds 3.4bn.

The underlying strength of the services sector was also evident from yesterday's final revisions to third-quarter GDP. The headline measure was unchanged: the ONS confirmed that GDP grew by 0.4 per cent in the third quarter. However, on the alternative output measure of GDP, the services sector grew by 0.8 per cent in the quarter, revised up from 0.6 per cent.