Isn't that exactly what Keynesian economics would predict if a country launched "meaningful" austerity?
Without external input, decreased spending would decrease demand, which would decrease output, which would reduce the expected revenue:spending increases from the initial spending cuts, which would require further spending cuts to hit ratio targets, etc etc.
It depends. Yes economics (both New Keynesians and Monetarist) would predict this but not for the reason you stated. The input does not have to be external, you just need a central bank to keep up demand (think NGDP). If you are in a system where you can not do that (as in the case of Greece) then you have a major problem.
The Keynesians believe that you can increase demand by government spending but that was not an option for Greece anyway. The EU would have to pay for it but its hard to do that and do fiscal reforms at the same time.
The only solution you have left is really harsh reforms, and most importantly wage cuts. A flexible labor system is the best defence against extend recession. Check out some of the Baltic states, they took pretty harsh wage cuts. They were lucky that they did not yet have such large governments and debt that this could be done and they did not have to face default at the same time.
Greece was institutionally not capable of these things, and their situation was bad to begin with.
The should have defaulted and set up a tmp government in 2008 that could do sweeping reforms. Had they had a high change of being more or less stable right now. But the EU is against that and Greece was faced with the impossible task of both do structural reforms, debt payback and terrible monetary policy from the ECB. Its an economic shit show of epic proportions.
I imagine a temporary government was completely off the table for political reasons, as advantageous as it might have been. "The EU reserves the right to replace your democratically elected government at will" would be a pretty frightening message to send.
Magnitude is important. If government spending is say 40% of GDP and it drops to 20% GDP then the drop in revinues is not 50%, but closer to 20%.
Importantly for a country used to borrowing every year living within their means will seem like a huge sacrifice even if it's not optional. The further drop to paying down debt is even further, but it's that or default. And no you can't grow the economy with stimulus spending when you got used to decades of stimulus spending in the first place.
Clearly you can't reasonably expect spend more than you earn with a reputation for defaulting on loans. However, it's debatable to what extent debt downpayment is requirement. The risk of default is part of the deal a creditor takes on.
If the intent is never to pay at the moment the loan is made, then it's fair to consider that fraudulent. But a loan isn't a guarantee - that's impossible. But situations unfortunately change. You can wait for default, but if you truly believe that the load has gone bad, it may well be better for both parties to renegotiate. If at that point you don't intent to pay the full original loan back (or as lender don't expect to receive all of the principal plus interest), that just means you're not delusional.
Back in the specific case of Greece, I think it may well be that the loan was taken in bad faith. But even though previous Greek governments committed fraud that doesn't mean anyone's better off now kidding themselves about the chances they'll pay.
Frankly, I'd argue that official lender's are already effectively forgiving loans by subsidizing indirectly via unreasonably good loan terms. No commercial entity would have given loans like the IMF and ECB have; they're worth far more than greece is paying. The question is then whether you're better off pretending that you are lending X principle at terms Y, or bookkeep that as the equivalent lending some fraction of X at fair-market terms Z. Even if greece can keep to the letter of the current deals, that's equivalent to having probably the majority of its debt forgiven, and the rest generating fair market returns.
It's just politics as to why that's not publically admitted - northern European voters might go bannanas. The downside is that the current situation might contribute to European instability, because southern Europe (and especially Greece) really believes they're paying all that unsustainable debt, when in fact, they aren't not really, not even today.
Without external input, decreased spending would decrease demand, which would decrease output, which would reduce the expected revenue:spending increases from the initial spending cuts, which would require further spending cuts to hit ratio targets, etc etc.