By Matthew Brown and Keith Jenkins Jan. 20 (Bloomberg) -- Greek bonds tumbled, pushing the yield on the two-year note up by almost 90 basis points, on concern the government will struggle to sell the debt it needs to fund the biggest budget deficit in the European Union. The two-year note yield jumped 88 basis points to 4.60 percent as of 12:28 p.m. in London, the biggest increase for the security since it was issued almost two years ago. The 10-year bond yield advanced 27 basis points to 6.18 percent, with the premium investors demand to hold the debt instead of benchmark German bunds to 294 basis points, the most since March 16. The Greek finance ministry may sell five-year bonds privately to banks this month, Imerisia newspaper reported today. Greece issued bonds directly to selected investors last month, instead of offering them via auction or through a syndicate of banks, after its borrowing costs surged in the wake of three credit downgrades. “Uncertainty over whether it will sell bonds privately or through a syndication is putting Greece under pressure,” said Patrick Jacq, a senior fixed-income strategist in Paris at BNP Paribas SA. Greece’s credit ratings were lowered by Standard & Poor’s, Moody’s Investors Service and Fitch Ratings last month on concern Prime Minister George Papandreou will struggle to cut a budget deficit that was 12.7 percent of gross domestic product in 2009. International Monetary Fund Managing Director Dominique Strauss-Kahn said in Hong Kong today Greece’s fiscal situation is “a serious problem” for the region. Stocks Fall Greek stocks declined, with the benchmark ASE Index falling as much as 3.1 percent. The cost of insuring against losses on the government’s bonds increased, with credit-default swaps on Greece rising 10 basis points to 327, according to CMA DataVision prices. The cost was 174 on Dec. 1. Portuguese and Spanish securities also fell as investors bet Greece’s difficulties will be replicated in other countries as governments raise unprecedented amounts of debt to finance economic stimulus measures. European Commission President Jose Barroso said the region’s economy is at a “delicate moment.” The Portuguese 10-year bond yield advanced 8 basis points to 4.27 percent, with the equivalent-maturity Spanish security’s yield rising 4 basis points to 4.04 percent. Greece plans to sell more than 53 billion euros ($75 billion) of debt this year, according to the government’s deficit-reduction plan. About half will be sold in the second quarter, when more than 16 billion euros of bonds mature, Finance Minister George Papaconstantinou said today. The government may turn to banks again for a private placement this month, Spyros Papanicolaou, head of the Public Debt Management Agency, said Jan. 5. Three-Year Plan Greece will reduce spending and raise revenue by about 10 billion euros this year as part of a three-year plan adopted last week to bring the deficit within the EU’s limit of 3 percent in 2012. The proposal aims to cut the gap to 8.7 percent of GDP this year partly by freezing hiring and capping wages for some public workers. The plan, presented to the European Commission on Jan. 15, “is consistent with Moody’s A2 rating on Greek government bonds,” the New York-based ratings company said yesterday. Doubts about the nation’s “ability to implement the program” prompted it to keep a negative outlook on Greece, Moody’s said. Fitch Ratings cut Greece’s debt to BBB+ on Dec. 8. S&P followed eight days later, lowering the grade to BBB+. Moody’s cut Greece to A2 on Dec. 22. Statistics Accuracy Papaconstantinou today blamed the rising premium on Greek bonds on investor concern about the reliability of the nation’s economic data. The European Commission on Jan. 12 said “severe irregularities” in Greek statistics left the accuracy of the estimate in doubt. “Greece is paying the price of statistical irregularities by paying higher spread,” Papaconstantinou said at a press conference in Athens. “The move shows how vulnerable the market is,” said Steve Mansell, director of interest-rate strategy at Citigroup Inc. in London. “If Greece wants to bring debt into the market in the current environment, they will have to come at a discount to surrounding issues.” To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Keith Jenkins in London at Kjenkins3@bloomberg.net

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