By Lionel Laurent and Leigh Thomas
PARIS (Reuters) - A state lifeline to wind down a small, ailing French mortgage lender is likely to carry a political price for President Francois Hollande as he grapples with rising unemployment and economic slowdown, even though there is no immediate budget hit.
The government promised over the weekend to guarantee Credit Immobilier de France's debt, putting an end to the bank's vain search for a buyer after credit rating downgrades drove it into a funding wall.
Unlike Franco-Belgian bank Dexia, which was also rescued with guarantees in the wake of the eurozone debt crisis, CIF is profitable and can be wound down gradually without requiring an injection of taxpayer money, bankers said Monday.
But the bailout risks giving voters the impression that the Socialist president is going soft on the financial sector after promising during his election campaign to crack down on the industry for perceived excessive risk-taking and lavish bonuses.
The daily Le Monde highlighted the irony with a cartoon showing Hollande rescuing a drowning CIF banker while recalling his campaign mantra that "my adversary is the world of finance ... but I don't like seeing people suffer".
With a mortgage market share of 3.5 percent and assets of 33 billion euros ($41.60 billion), analysts said CIF's troubles were easily contained and specific to the bank's reliance on market funding, rather than to the quality of its assets.
Financial market players said France's sovereign bond yields are unlikely to come under pressure from the debt guarantees, set to cover up to 20 billion euros of CIF debt.
But some warned of a likely public backlash against Hollande over the consequences on jobs.
"The market is going to be more understanding than the French people," said a bond trader specialised in French institutions, who spoke on condition of anonymity.
The bailout adds to Hollande's headaches at a moment when his approval ratings have slumped as he struggles to make good on campaign promises to rein in unemployment. His labour minister said on Sunday the jobless total has breached the psychologically important level of 3 million, more than 10.3 percent of the workforce.
Credit Immobilier de France's 2,500 employees and 300 branches are unlikely to survive due to conditions attached to the state guarantees, which are subject to European Union approval, according to SNB bank union leader Regis dos Santos.
"We're already seeing comments from the public saying that the state is rescuing a French bank... even when the government has not spent a single penny," said dos Santos. "This is going to impact public opinion."
He questioned whether regulators and regional authorities in charge of the CIF had put enough pressure on its outgoing chief executive, Claude Sadoun, to change a business model that relied exclusively on market funding and that had taken a hit with every credit-market flare-up since 2008.
"If there had been more pressure on CIF's management to find a buyer, it's possible we could have preserved jobs," he said.
A spokeswoman for CIF did not respond to requests for comment.
Known for lending to low-income borrowers buying flats in social housing, CIF's problems risk worsening a shortage of affordable housing since the state banned the bank from making further loans as a condition of the guarantee.
"I don't think the state really had a choice... But the fact that financing from the CIF is now set to shrink is more or less bad news for the economic climate and for the residential property market," said Senator Philippe Marini, a banking expert for the opposition UMP conservative party.
The government's pledge to keep CIF afloat comes as it is preparing to make the biggest cut in the public deficit in the history of modern France.
Even though the national debt is due to hit a record of more than 90 percent of gross domestic product in 2013, investors are treating Paris like one of Europe's strongest borrowers, allowing the government to raise funds at all-time lows.
Although the guarantees won't strain the budget unless losses are realized, they will add up to 20 billion euros or roughly 1 percentage point of GDP to the public debt under EU accounting rules.
That comes on top of tens of billions of euros in guarantees for troubled Franco-Belgian lender Dexia and the euro zone's EFSF bailout fund to which France is already committed.
"It adds to the contingent liabilities, so it does not go in the right direction," said Barclays Capital chief European economist Phillipe Gudin de Vallerin, who until recently was a senior official at the French Treasury.
"It's always a bit disturbing to discover unpaid bills when you open a drawer," he said, adding however that the level of contingent liabilities mattered less than overall public finance fundamentals and how well authorities manage them.
Credit ratings agencies are looking closely at euro zone governments' contingent liabilities with both Moody's and Fitch having negative outlooks on their AAA ratings for France.
CIF's rescue may complicate the government's task of selling huge tax increases to an already bailout-weary public when it unveils its 2013 budget at the end of the month.
The bailout risks giving the public the impression that Hollande is going soft on the financial sector after promising during his campaign to crack down on the industry for perceived excessive risk-taking and lavish bonuses.
($1 = 0.7933 euros)
(Additional reporting by Catherine Bremer; Editing by Paul Taylor)