Dress it how you will - Greece is heading for default

Eurosceptics on this side of the English Channel are trying hard not to say: "I told you so." Executed with northern European creativity, charm, flexibility and humility, and Mediterranean organisation, leadership diligence and appetite for hard work, the European rescue plan - "the grand compact" - is failing.

An immediate crisis might be avoided but the stage is now set for a slow drift to future debt restructuring for some of these peripheral countries, and a European banking crisis. Greek interest rates of about 18% (for 10 years) and 30% (for two years), Irish and Portuguese rates of more than 12% (for two years) and 10% (for 10 years) testify to this trajectory. Markets put the chance of a Greek default at 80%. The chance for an Irish and Portuguese default is about 50%.

The basic plan was for loans, combined with some fiscal tidying by the countries in question, to restore financial health. But that was always a case of wishful thinking. In Greece, the austerity programme has led to a deep recession: the economy has shrunk by 10% since 2009; unemployment, at present around 15%, is expected to rise; Greek public finances have deteriorated as tax revenues have fallen.

Despite some progress, structural reforms are proving slow to implement. A plan to privatise �50billion (£44.9billion) of assets looks optimistic - even �15billion would be difficult to achieve.

Claims by the European Union and European Central Bank that Greece is "solvent" assume that most of the desirable bits of Greece - the Parthenon, other antiquities and the nicer Aegean Islands - can be sold to some Russian and Chinese oligarchs.

Ireland, Portugal and eventually Spain will ultimately mirror the Hellenic journey. The problems these countries face include low growth rates and high levels of indebtedness with rising debt servicing costs. The combined reduction in government spending and higher taxes strangles their economies. The austerity programmes prescribed by the EU, ECB and International Monetary Fund as a condition of the bailouts reinforce this pernicious slide into economic oblivion.

The peripheral countries are trapped in a vicious cycle. A weak economy raises budget deficits which, in turn, drive government debt higher. This requires even more cuts in government spending and higher taxes, leading to further contraction in the economy. This drives a deteriorating credit-rating outlook, reduced access to commercial financing and higher funding costs, which contribute to further declines. As some of these countries are heavily dependent on external financing, a crisis becomes almost inevitable.

In the near term, the EU and eurozone members are likely to persist with their failed strategy. Further funding needs will be accommodated as they emerge from the existing facilities as much as possible, until these are exhausted. German insistence on commercial lenders sharing some of the burden has wavered. Instead a fuzzy idea of a "voluntary" commitment of existing lenders to re-finance existing, maturing debt is now under discussion. Over time, the palpable failure of the bailout strategy will progressively be revealed.

Already, Greece has received reductions in interest rates on bailout funding and some extension in the terms of the financing. The need to provide additional funding to Greece of about �120 billion is under discussion. In all probability, some deal will be done to provide the funds, against Greek promises that cannot and will not be met.

In the end, default or restructuring will become inevitable - at first, steps such as reducing the coupon or postponing the maturities of bonds will be suggested as a cure for the problem. But ultimately a major restructuring, involving a significant write-off of outstanding debt, is likely.