UPDATE 1-Hedge funds play a vital role - France's Moscovici
* Funds play "essential" role in financing the economy
* Marks shift from traditional French anti-finance rhetoric
* "Tactical" attempt to rebuild relations - fund manager
* Left-wing lawmakers say they want to make law tougher (Adds lawmaker comment)
By Lionel Laurent
PARIS, Feb 5 (Reuters) - Hedge funds play a vital role in the French economy, finance minister Pierre Moscovici said, in comments aimed at defending a government plan to ringfence banks' proprietary trading and leave hedge-fund financing intact.
The proposed reforms, set to be debated in parliament this month, would force banks to make proprietary trading a separate self-funded entity and ban them from owning or operating hedge funds. Secured hedge-fund financing would be left intact.
"While some of these funds have strategies that should be criticised, today the vast majority are necessary and essential players when it comes to financing the economy, whether we like it or not," Moscovici wrote on his official website on Tuesday.
He cited small to medium-sized companies raising funds on the convertible bond market as an example of hedge funds' usefulness. "Hedge funds can represent 60 to 80 percent of demand on this market and so are essential for placing the securities in the best possible conditions for the companies."
Moscovici's stance was at odds with traditional anti-finance rhetoric from politicians on all sides. President Francois Hollande said during his 2012 campaign that "speculative funds ... (were) vectors of instability", while his predecessor Nicolas Sarkozy called them "predators" in 2007.
A Paris-based hedge fund manager said the government was changing its rhetoric to drum up support for the reforms and also to build confidence at a time of economic stagnation and bad blood among voters over stubbornly high unemployment.
"For 10 months the government has spent so much time bashing entrepreneurs and the business world that it must be thinking it is time to mend relations," he said. "It is tactical."
France's proposed bank reforms have been panned as too soft by critics including Brussels-based Finance Watch, especially compared with recommendations by the European Union's Liikanen Commission for a broader separation of all trading including market-making.
"What (Moscovici) seems to be saying is that there is no speculation anywhere anymore," said Thierry Philipponnat, head of Finance Watch, adding that hedge funds bought convertibles to support their own strategies, which included short-selling, and to finance the economy.
While most politicians have, so far, played down the likelihood of a major overhaul of the reform in parliament. However, some left-wing members of parliament are in talks to toughen up the bill by voting amendments through.
"We will propose many amendments because it is really lacking in several areas ... The separation (of activities) is not clear enough," Communist lawmaker Andre Chassaigne said.
Meanwhile, the head of French bank Credit Agricole , Jean-Paul Chifflet, said a stricter reform law would hurt banks' ability to lend. "Going beyond the current plan, with a stricter separation of banks' operations, would be serious for our country," he told Les Echos newspaper. (Additional reporting by Emile Picy; Editing by Louise Ireland and Dan Lalor)
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