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September 16, 2011 / subramanyam

Austerity Measures — A brief explainer

          We all know the crisis engulfing European economies, most of the economies are witnessing near 0% growth rate and some are almost there in the recession mode.This is forcing some of the countries there to adopt austerity measures . An austerity measure is an official action taken by a government in order to reduce the amount of money that it spends or the amount that people spend.

        Austerity measures are typically taken if there is a 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 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’.

Italy is already seeing some red in this regard and yesterday, the Italian parliament gave its final approval to the austerity plan aimed at fixing the debt crisis. Here is the infographic of Italy’s austerity plans , I picked this up from the thomsonreuters blog .

The infographic of Italian Government's Austerity plan


I have used some content from wikipedia also in this post.


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