LYON, France (Reuters) - France will fight to cut its budget deficit to the EU's target ceiling next year because an overshoot would damage the country's credibility, Finance Minister Pierre Moscovici said on Thursday.
The European Commission warned on Wednesday that France's forecasts were too optimistic and that tax hikes would hit growth next year, which it expects to be half the 0.8 percent assumed in France's 2013 budget.
France enjoys some of the lowest borrowing costs in the euro zone, even though it has lost one of its AAA credit ratings.
But a downgrade of French banks by credit-rating agency Standard & Poor's and worries about the pace of economic and fiscal reform have prompted investors to question the low yields they are accepting on the country's debt.
The Socialist government has challenged the Commission's assessment of its budget and economic growth forecasts, saying it did not take into account future benefits from a competitiveness package unveiled this week.
"I have an absolute conviction, which I am defending tooth and nail, which is that France would be penalized, and perhaps punished, if it lets its guard down, we cannot allow it," Moscovici said during a conference in the eastern city of Lyon.
As investors try to gauge President Francois Hollande's fiscal credibility and appetite for difficult reforms, notably on the labor market, Moody's rating agency is due to update its view on France this month.
In May Moody's restated its negative outlook for its Aaa rating on French debt, saying it needed more time to assess how France would manage its public finances through weak growth. (Reporting By Jean-Baptiste Vey; Writing by Nick Vinocur; Editing by Ruth Pitchford)