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The International Monetary Fund, the European Union and the World Bank are bailing out Hungary's economy out of fear that the severe financial crisis there will spread.

The International Monetary Fund (IMF) announced Oct. 29 that it will join the European Union and the World Bank to give a 20 billion euro ($25.5 billion) loan to Hungary — the largest such loan since the global financial crisis began. The IMF will contribute 12.5 billon euros ($15.7 billion), the EU 6.5 billion euros ($8.1 billion) and the World Bank 1 billion euros ($1.3 billion) in what is the first coordinated effort to bail out a state in the current financial crisis. The 20 billion euro package follows the Oct. 16 loan from the European Central Bank (ECB) for 5 billion euros ($6.75 billion), for a total aid effort of 25 billion euros ($32.3 billion).

The enormity of the IMF bailout — and the IMF’s coordination with the EU — illustrates the severity of the crisis in Hungary and the fear that the crisis could spread to the rest of Central Europe and the Balkans, where countries face fundamentally the same problems as Hungary. The rapid influx of foreign capital into these economies, combined with the largely foreign ownership of their banking systems, makes for an unstable liquidity situation in light of the global flight of capital to safety. Foreign banks in the region — particularly Italian, Swedish, Austrian and Greek banks — have multiple assets that may be lost when Central European and Balkan customers can no longer pay their loans due to depreciating currency, which will only encourage the crisis to spread further and faster.

Hungary has the distinction of being the first Central European economy to feel the full effects of the crisis because of a combination of the government’s economic mismanagement, which has allowed the budget deficit to balloon to 5.5 percent of gross domestic product (GDP), and particularly heavy reliance on foreign denominated loans — particularly in Swiss francs. The Austrian and Italian banks that dominate Hungary’s banking sector, along with Hungary’s biggest domestic banks, made loans denominated in low-interest Swiss francs the primary method of financing consumer and mortgage debt in Hungary. Since 2006, nearly 90 percent of all mortgages have been denominated in Swiss francs. On Oct. 15, Austrian banking giants Raiffeisen and Volksbank restricted foreign currency lending. MKB Bank (the Hungarian arm of Germany’s Bayerische Landesbank) followed suit, and on Oct. 29 so did CIB Bank, the Hungarian subsidiary of Italy’s Intesa. Swiss franc loans account for approximately 40 percent of both the total mortgage and total consumer debt market.