Report this content as inappropriate on the site:
Answer:
In economics, austerity is when a government reduces its spending and/or increases user fees and taxes to pay back creditors. Austerity is usually required when a government's fiscal deficit spending is believed to be unsustainable.
Austerity measures are typically taken if there is a perceived threat that government cannot honor its debt liabilities. Such a situation may arise if a government has borrowed in foreign currencies which they have no right to issue or they have been legally forbidden from issuing their own currency. In such a situation banks may lose trust in government's ability and/or willingness to pay and refuse to roll over existing debts or demand exorbitant interest rates. In such a situations, inter-governmental institutions such as the International Monetary Fund (IMF) typically come in and demand austerity measures in exchange for functioning as a lender of last resort. When the IMF requires such a policy, the terms are known as 'IMF conditionalities'.
