By John W. Schoen Senior producer
msnbc.com
updated 9/9/2011 4:54:47 PM ET 2011-09-09T20:54:47

Time seems to be running out for the Greek economy.

A year and a half after European officials began scrambling to avert a default by Greece on its unsustainable pile of debt, their efforts appear to be falling short. The growing worries over Greece and Europe in general contributed to a stock market sell-off Friday, with the Dow Jones industrial average shedding more than 300 points .

Europe's stronger economic powers — mainly Germany and France — have insisted that Greece get its budget under control as a condition of providing financial assistance. But Greece has been unable or unwilling to meet the "austerity" targets it agreed to. Last week, officials from the International Monetary Fund, one of the agencies Greece is depending on, broke off talks, saying the government had failed to abide by its budget-cutting promises.

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On Friday, Britain's Daily Telegraph reported that Germany and Holland also said, in effect, "Enough." The newspaper reported the two countries have threatened to block rescue payments unless Greece sticks to its budget promises.

The issue is a central sticking point at contentious discussions in France this weekend among finance ministers of the so-called Group of Seven, including the United States, Japan and major European economies.

"It is completely within the capacity of the stronger members of the euro area to absorb those costs," Treasury Secretary Timothy Geithner said at the meeting. "Those costs would be much, much greater for them and their economies if they sit here and do nothing and they recognize that."

Greek officials are in a tough bind. The Greek economy is stuck in a downward spiral with the economy shrinking at a annual rate of 7.3 percent, according to figures published Thursday. Yet the efforts to raise taxes and cut spending are making the Greek recession worse.

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European central bankers are increasingly divided on what role they should play in resolving the crisis. On Friday, a member of the central bank's executive board resigned as debate raged over whether to buy up dodgy government bonds from Greece and other Eurozone members struggling with too much debt.

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Central bankers face something of a lose-lose problem: If they buy up Greek debt and the country eventually defaults, they face a huge political backlash. If they don’t, the banks holding that bad debt are that much closer to insolvency. Investors have grown increasingly worried that some European banks holding Greek debt may not be able to withstand the losses if the country defaults.

As the Greek financial crisis intensifies, there are potentially bigger problems looming for eurozone officials. Investors have begun to shun debt from countries with larger economies like Spain and Italy. That has forced officials in those countries to embark on their own rounds of budget cutting. But it's not easy: Italian officials have rejected four separate budget proposal in the past few weeks.

Though a Greek default would send shock waves through the global financial markets, European officials have assembled a billion-dollar bailout fund that could be used to calm investors. But it's nowhere near large enough to backstop a default by Italy.

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