Nov. 16 (Bloomberg) -- Greek bonds dropped as the nation’s deteriorating finances deterred investors from owning the government’s debt.

The difference in yield, or spread, between 10-year Greek securities and benchmark German bunds widened to 156 basis points, the most since July 16. The yield on the bond climbed 11 basis points to 4.89 percent as of 4:45 p.m. in Athens. The yield has risen 22 basis points in the past three days.

Greece’s central bank asked domestic lenders to outline potential funding sources in coming months as the European Central Bank begins to tighten the liquidity it provides to Europe’s banking system, Euro2day reported. A reduction in banks’ access to cash might dent their appetite for bonds and halt gains in the euro-area’s best performing bond market this year just as the government boosts borrowing.

“Confidence in Greek bonds is pretty edgy at the moment,” said Orlando Green, a fixed-income strategist in London at Calyon, the investment-banking arm of Credit Agricole SA. “There are worries about Greece’s growth and budget outlook. Rumors circulating around are having a more profound effect because the fundamentals are so poor.”

Greek Central Bank

In a letter to the institutions, the Athens-based central bank said Greek lenders as a whole had borrowed amounts that were proportionally greater than other countries in the 16- nation euro area, the Web site said, without saying where it got the information. Greek banks have borrowed a total of 42 billion euros ($63 billion) of the 570 billion euros the ECB has pumped into the system, according to Euro2day.

Greece’s central bank had advised a number of commercial banks to be more “prudent” in participating in the European Central Bank’s 12-month liquidity offerings in December, to facilitate their exit from the one-off measures, the bank said in an e-mailed statement today.

The central bank hasn’t banned any bank from the operations and this recommendation isn’t linked to Greek government bonds that they hold or want to acquire, the bank said.

National Bank of Greece SA, the country’s biggest bank, fell 1.64 euros, or 6.8 percent, to 22.62 euros, while EFG Eurobank Ergasias SA, the second largest, lost 73 cents, or 7.1 percent, to 9.57 euros, the biggest decline on the Bloomberg index of 63 European financial institutions. The Athens benchmark general index declined 3.3 percent, falling the most in five months.

‘Exit Strategies’

“There’s uncertainty about the ECB talking about exit strategies, and this is putting pressure on the weaker countries and that’s mostly Greece and Ireland at the moment,” said Michiel de Bruin, head of European government bonds at F&C Asset Management in Amsterdam. “There’s also uncertainty about next year’s supply, liquidity drying up toward the end of the year, and now we are seeing volatility returning to the market.

Greece’s gross domestic product declined 0.3 percent in the third quarter from the second, when it shrank a revised 0.1 percent, the Athens-based national statistics agency said in a statement on Nov. 13. That means the economy has been mired in a recession for a year.

Greece’s budget deficit, which is forecast to be 12.7 percent GDP this year, is a “concern for the whole euro area,” European Economic and Monetary Affairs Commissioner Joaquin Almunia said on Nov. 11.

Fitch, Moody’s

Greece’s credit rating was cut a step by Fitch Ratings last month and Moody’s Investors Service placed the country’s ratings on review for a possible downgrade after the country increased estimates for its budget deficit to more than four times the European Union limit.

The nation’s bonds have returned 9.9 percent this year, the best performance of 12 euro-area countries, according to Bloomberg/EFFAS indexes. Euro-area bonds returned 4.4 percent, the indexes show. Some investors may be selling Greek notes to take advantage of a rally that pushed the yield spread with Germany down to 108 basis points in August from 300 basis points in March, de Bruin said.

“We have seen some aggressive tightening in spreads this year and nervousness around this is also putting pressure on,” he said. “On a medium term basis we are still constructive on Greek bonds although there’s volatility in the meantime.”

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Maria Petrakis in Athens at mpetrakis@bloomberg.net

Last Updated: November 16, 2009 11:50 EST