ECB's Mersch warns of real financial crisis

LUXEMBOURG (Reuters) - The world financial system faces a real crisis because of U.S. subprime mortgage problems, but banks should be more or less able to absorb the resulting losses, ECB Governing Council member Yves Mersch said on Monday.

Mersch made his remarks in a foreword to the Luxembourg central bank's annual financial stability report, which largely echoed recent ECB language on how the euro zone economy was facing up to financial market turmoil.

Euro zone growth fundamentals are basically strong but there is a risk of higher inflation pressure from rising wages and raw material costs, the report said.

"Risks on price stability remain upwards. They are linked on one side to the strengthening of inflation of raw material prices. Also, upward pressures on consumer prices from wages could accelerate," the bank said.

"The uncertainty surrounding the projections for economic growth remains abnormally high," it said. "These risks are linked to turbulence on the financial markets which could have a bigger impact than currently forecast."

Mersch said that the problems on the U.S. subprime mortgage market which emerged last year had spread surprisingly fast, but he was still confident about most banks' ability to absorb them.

"What was initially seen as a simple readjustment of risk underpricing in property lending has transformed into a real international financial crisis," he said.

"Initial estimated losses of around 100 billion have since been revised up. Despite this major cost, it seems to me that the international financial system has the capacity to absorb these losses with more or less of ease," he continued.

But not all banks in Luxembourg, where finance is the main industry, would do so well.