The international credit crunch is set to claim its biggest Scottish casualty later this week when the Royal Bank of Scotland unveils a pre-tax loss for the first half of the year that analysts believe could reach £1.7billion.

Such a loss would be the biggest in British banking history and have major consequences not only for the financial sector, but also the Scottish economy.

The results, due to be announced on Friday, will underscore how far-reaching the credit crunch, which began in the United States more than 18 months ago, has been.

HBOS, owner of Bank of Scotland and Britain's biggest mortgage lender, reported a 51 per cent drop in pre-tax profits to £1.4billion last week after taking a £1billion hit as a result of the credit crunch. Analysts expect that RBS will be forced into the red by an expected writedown of almost £6 billion against its exposure to the crisis.

RBS, whose financial services empire dominates commerce in Edinburgh, is one of Scotland's biggest employers, with 16,400 staff on its payroll, and is described as the engine room of financial growth in Scotland.

A big loss at the bank, which can date its roots back to its foundation in Edinburgh by royal charter in 1727, will set the agenda for further potential losses for the rest of the year.

“What's bad news for the bank will be seen as bad news for Scotland,” said one financial analyst in Edinburgh. “Royal Bank is a global financial institution. It is number two in the UK and the fifth-largest bank in the world. But make no bones about it, RBS still carries the tartan tag.”

The Scottish Financial Enterprise says that banks, fund managers, insurers and other financial service companies employ about 100,000 people in Scotland, equivalent to roughly 10 per cent of the working population. These generate £8billion of GDP between them, equal to about 8 per cent of Scottish GDP.

Owen Kelly, chief executive of Scottish Financial Enterprise, said: “RBS is arguably Scotland's leading company, undeniably one of the success stories of recent years. A company with the global reach that they have is obviously going to be affected by global market conditions.” But Mr Kelly added: “You really have to look at the underlying strength of the company, rather than figures based on accounting requirements.”

The results will be a big test for Sir Fred Goodwin, RBS chief executive. Sir Fred, who has been trying to cut loose from the nickname, Fred the Shred, for his ruthless cost-cutting skills, drove the bank's takeover of National Westminster Bank in 2000, the biggest takeover in the history of British banking and widely seen as a successful deal.

He also spearheaded the audacious takeover of the Dutch bank ABN Amro, which RBS acquired as part of a consortium that included the Belgo-Dutch financial group Fortis and Banco Santander, the Spanish bank that owns Abbey and has just agreed to buy Alliance & Leicester. The consortium outbid Barclays, although the takeover took place at the top of the market.

Sir Fred has been more recently preoccupied with the bank's £12 billion rights issue, a call for cash from existing investors in exchange for new shares in the bank. RBS was the first British bank to pursue this form of capital-raising as part of its efforts to shore up the strength of its balance sheet. The tactic has since been adopted by HBOS, which has raised £4billion, and Barclays, which has turned to specialist investors for £4.5 billion.

RBS declined to comment on the prospective losses, but banking sources said that any losses would be based on accounting principles rather than an actual physical loss.

The bank will write down the value of certain mortgages and other securities it holds, which means it believes that these investments will unlikely recover.

These values can just as easily be written back up again if market conditions change. Underlying profits at RBS are also very healthy, according to most experts. Analysts at Dresdner Kleinwort reckon RBS's underlying business will post profits of almost £6.3 billion for the first half of the year, almost 2 per cent ahead of the same period last year.

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