Hold that order for the new 191mph Aston Martin DBS. City bonuses that looked in the bag just six weeks ago are starting to evaporate as the securities market turmoil takes its toll. Instead of big rises in bonuses this year, City workers now face cuts of about 10 to 20 per cent even if financial markets level off, headhunters predicted yesterday. Workers in badly hit sectors of the City, such as credit derivatives, debt issuance and trading, prime brokerage and mergers and acquisitions, could face much bigger cuts.

Harry Pilkington, partner in Armstrong International, the City headhunter, said: “Every line manager in the City will be managing expectations downwards.”

Until last month, most people in the City would have been in line for even bigger bonuses than the estimated £8.8 billion paid in London for performance last year. Bonuses are traditionally paid between November, when Goldman Sachs kicks off the annual bonanza, and March.

“The first seven months of the year were phenomenal,” Mr Pilkington said. But the squeeze in credit markets and flight to safety have dramatically darkened the pay outlook. Scores of deals and capital-raisings – the lifeblood of investment banks – have been shelved.

UBS, the Swiss bank and a major City employer, told shareholders and staff last week that it would report a very weak third-quarter trading result if market volatility persisted and that its second-half profits would fall. Banks could be hit not only because of a collapse in trading and deal volumes, but also because they could be forced to shoulder huge writedowns on debt securities they have been unable to syndicate out. At the year-end, these have to be valued at the going market price and any shortfall deducted from reported profits. Richard Snook, an economist for the Centre for Economics and Business Research, said: “If the weakness persists, we’d expect a considerable hit to City bonuses.”

Cutting bonuses is the first weapon for investment banks when times get tough as they account for a huge proportion of total expenses. “It’s a very easy way of cutting costs,” said Mr Snook, who added that job cuts were likely if the jitters continued.

The wholesale financial services industry and allied professional services employ about 340,000 people and help to sustain the South East’s economy, as well as boosting Treasury coffers and the balance of payments.

The belt-tightening is also being experienced in private equity, where deals have been shelved because of the sudden scarcity of debt, and in hedge funds, some of which have been hit by the recent turmoil in markets.

Sarah Butcher, editor at efinancial-careers.com, the City jobs website, said: “I’d estimate conservatively that bonuses will on average be down 10 to 20 per cent. If the credit crunch carries on into the autumn, the reductions could be much greater. If there is a financial catastrophe of some kind, bonuses could be virtually wiped out.” She pointed to the lean year of 2002 in the middle of the bear market: “Your bonus then was to keep your job.”

Even if bonuses are cut by 20 per cent, 2007 will still be one of the highest years on record. Bonuses have been soaring since markets picked up in 2003. Payments at Goldman Sachs were up 40 per cent last year. The CEBR estimates that total City bonuses grew from £7.5 billion in 2005 to a record £8.8 billion last year.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive