How to salvage this ruined wall so it can hold paint?
Assuming you have fixed the water problem (if not, give up), why not simply attach drywall directly to the entire surface. You may be able to adhere it with construction adhesive.  If not, use screws, if necessary, with anchors behind them. If it is available, consider moisture resistant drywall or even paperless. 

You can then put on any surface finish you want.