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UPDATE 1-CIF received emergency funds before rescue-sources

Thursday, 4 Oct 2012 | 10:07 AM ET

* Bank of France lent more than 2 bln eur - source

* France and EU regulators to hold talks on CIF rescue terms

* CIF declines to comment

* Bank of France says doesn't comment on liquidity assistance

(Adds detail, background) By Lionel Laurent

PARIS, Oct 4 (Reuters) - French mortgage bank Credit Immobilier de France (CIF) was benefiting from emergency Bank of France funding to keep it afloat months before a high-profile government rescue, banking sources told Reuters.

The news comes ahead of negotiations between France and European Union regulators on the fate of the bank and its 2,500 staff.

It shows how actively the Bank of France was working behind the scenes to prevent a crisis of confidence hitting the banking sector of the euro zone's second-largest economy.

In a controversial move that jarred with campaign rhetoric of a crack-down on excess risk-taking in the financial sector, French President Francois Hollande agreed last month to guarantee the bank's debt after rating downgrades starved it of funding.

Yet according to one source with direct knowledge of the matter, more than 2 billion euros ($2.6 billion) in emergency funds had been lent by then to CIF via the Bank of France, implying the lender had been struggling to raise money.

"When CIF ran into problems earlier this year it was forced to use the (central-bank) system," one source with direct knowledge of the matter told Reuters. "The exact number is unclear but it was more than 2 billion euros."

A second banking source, also with direct knowledge of the matter, confirmed the lending had taken place but did not give a figure for the amount of credit CIF received.

The Bank of France declined to comment, saying it never publicly reveals the identity of banks that are granted emergency funds in a cash crisis.

Franco-Belgian bank Dexia , which was rescued and broken up by its national shareholders, was the most recent beneficiary of this facility.

CIF Chief Executive Bernard Sevez also declined to comment on the sidelines of a French parliamentary Senate hearing on the bank, as did a company spokeswoman.

Management has continued to present CIF as a healthy entity with 2.4 billion euros of equity and 37 million in net profit for the first half of 2012.

FUNDING CRUNCH

Sevez told the Senate hearing on Wednesday that CIF was "like a great car that has run out of petrol", in a reference to its funding problems.

CIF, a lender to low-income borrowers which relies purely on credit markets to fund operations, first ran into trouble in February when credit-rating agency Moody's warned that its risky funding model might lead to a four-notch rating cut.

The prospect of a funding crunch led to a temporary halt in trading of CIF's bonds and pushed the bank to seek a takeover.

Its fruitless five-month quest for a buyer finally prompted the government to intervene with a 28 billion-euro state guarantee effectively bailing out CIF's creditors and counterparties, including major banks.

Although the exact size of the aid remains unclear, its existence could affect talks between France and EU regulators over the future of CIF and whether the guarantees complied with EU rules on state aid.

French officials told the Senate hearing they had demanded CIF's 33 billion-euro loan portfolio be gradually wound down - a process that could take more than a decade - as a sop to the EU.

This has triggered a backlash among CIF staff, many of whom marched through Paris last month in protest at the terms of the bailout.

($1 = 0.7751 euros)

(Additional reporting by Christian Plumb and Leigh Thomas; Editing by Mark John)

((lionel.laurent@thomsonreuters.com)(+33)(0)(1 49 49 56 85)(Reuters Messaging: lionel.laurent.thomsonreuters.com@reuters.net))

Keywords: FRANCE CIF/