The risk of Greece defaulting on its debt has jumped to the highest level since the eurozone crisis, as investors fear the country is on a collision course with its creditors.

Insuring Greek bonds against default now requires an upfront payment as the country is considered in distress. That upfront cost rose 5 basis points on Monday, to the highest point since 2012, according to Markit.

Greek borrowing costs also rose following the Greek prime minister’s declaration at the weekend that he would not seek an extension to the country’s bailout, which is due to expire at the end of this month.

The three-year bond sold last year with a yield of 3.5 per cent now yields more than 21 per cent, while the benchmark 10-year bond yield moved from 10.08 per cent to 10.81 per cent on Monday.

In equity markets, banks bore the brunt of a sell-off that saw the Athens stock exchange drop by almost 6 per cent.

Greek markets have been increasingly volatile since the Syriza party came to power in mid-January, as investors attempt to judge whether the country can reach a compromise with lenders. Last week Standard & Poor’s lowered its rating for the country to B minus while keeping it on negative watch and Moody’s indicated the possibility of a downgrade by placing Greece on a negative rating watch.

Greece’s prime minister wants to restructure the country’s €315bn foreign debt and end the punishing austerity regime.

On Sunday, he said the existing multibillion-euro bailout had failed and that he would not seek an extension to the February 28 deadline, but would look for a bridge agreement until June. However, Jeroen Dijsselbloem, the Dutch minister and chairman of the eurogroup of finance ministers, has previously rejected the idea of a short-term financing arrangement for the country.

Reinhard Cluse, economist at UBS, said the European Central Bank had clearly increased pressure on the Syriza-led coalition government, whose overtures about debt and fiscal relief had not found sympathy with national governments or the troika of creditors — the EU, ECB and International Monetary Fund.

“The overriding question is whether compromise will be found freely or be forced by economic and financial stress, or even fears of a Greek exit,” he said.

Market commentators say a voluntary Greek exit from the eurozone remains unlikely and Greek banks have sufficient “ emergency liquidity assistance” funding for a few quarters, but that without a deal with creditors deposit flight could accelerate.

“We think Greece will extend the programme, but its debt remains unsustainable in the long run,” said Alberto Gallo, head of European macro credit research at RBS.

“We stay underweight on Greece as negotiations over a programme extension and/or debt relief may become more confrontational in the near term.”

Copyright The Financial Times Limited 2019. All rights reserved.

Follow the topics in this article