The problem is twofold.
1)The recession is much deeper than anticipated even by IMF/ECB, thus causing a collapse in revenues.
2)The government is exhausted after waging for two years a brutal war on two fronts: an external one with our debtors and an internal one against a unified and stringent opposition (where you can barely distinguish conservatives from communists, they use the same pro-bigger government rhetoric) with the help of the most reactionary and statist elements of PASOK.
There are many people in the government, fortunately Papandreou is among them, that refuse to capitulate and continue to fight for reforms, ignoring the (often violent) protestations of powerful unions. But as long as some parts of our society sabotage them (like our IRS agents who refuse to collect taxes or make audits because their wages have been cut) it will be very hard to stay afloat without external help.
Like most things this really seems to come down to institutional strength and legitimacy. I think Papandreou pretty much has it together in terms of what has to be done, but unless Greek society comes together to get it done, it's not going to work.
The kind of reforms that need to happen in Greece cannot, imo, be done without solid support, at least in the political establishment. Sweden was, roughly speaking, about as fcked as Greece is now back in the 90s. The reforms that were made to prevent a repeat (which are helping us now) had support from both blocs (not the silly ex-Communists, but they don't matter much) as well as the trade unions and such. Without that it would never have worked.
It seems to me that the Greek state is lacking some fundamental legitimacy among the Greek people. That's very much an outsider's observation which isn't based on much though.
