That's not how number 2 would go.

Number 2 is what governments SHOULD do, but it's also the fastest way to have the bulk of citizens actually riot against them, because so many people rely on government subsidy to get by, which in turn needs money printer to go brrrrrr.

There would be absolute chaos and destruction before austerity ever resulted in healing, and that's only if they managed to hold the line through the ordeal.