Europe's weaker economies are in the grip of a worsening credit crunch

The joke recounted by the boss of a large Italian bank is an old one, but it captures the moment. Two hikers are picnicking when a bear appears. When one laces up his boots to run, his friend scoffs that he can't outrun a bear. The shod hiker retorts that it is not the bear he needs to outrun, merely his fellow hiker. "We're sitting at the picnic with our boots still on," says the bank boss.

As policymakers and pundits try to work out the effects of a Greek exit, banks and investors have already been taking precautions. One course of action has been to pull money out of more fragile markets. Never mind the weakest economies like Greece, Ireland and Portugal, Spain and Italy have also lost foreign bank deposits of about €45 billion ($56 billion) and €100 billion respectively from their peaks. Add in things like sales of government bonds by foreigners , and capital flight is probably equal to about 10% of GDP in those countries, say Citigroup analysts. Such outflows are hard to stop.

The European Central Bank (ECB) has filled this funding gap by providing liquidity to the banks. But that has in turn reinforced the second precautionary tactic: matching assets and liabilities within countries as much as possible. It is a common refrain from bankers that the euro area no longer functions as a single financial market, although that has the paradoxical advantage of making a break up less destructive. Banks have used ECB loans to borrow from the national central banks of the countries in which they have assets; that should mean that both sides of the balance-sheet would get redenominated in the event of a euro exit.

Much of that ECB liquidity is meant to find its way into the real economy, of course. But the third precautionary technique, for both lenders and borrowers, is to hang fire while uncertainty is so high. The Economist has compiled a credit crunch index, comprising a number of measures on everything from bank lending to the cost of buying insurance against default for banks, firms and sovereigns in the euro zone. A single index disguises big differences between weaker and stronger states, but it shows that credit is crunchier now than it was at the height of the banking crisis in 2008.

Much economic activity is being strangled as a result. In Spain firms have put bond issues and asset sales on hold. Volatility makes it almost impossible to value an asset, bankers say. The Catalan government failed to sell 26 buildings in Barcelona earlier this year for about €450m because one of the bidders wanted to introduce a clause that said rents would be paid in dollars in the event of a euro break-up the other bidder pulled out because it had been told by headquarters to hold off on deals in southern Europe.

The number of Spanish companies filing for bankruptcy climbed by 21.5% in the first quarter. Nearly a third of these were in the property or construction industries, but the rot is spreading. Alestis, an aeronautical supplier to aircraft manufacturers, filed for bankruptcy earlier this month after failing to reach an agreement with banks to refinance its debts.

The sound of credit crunching can also be heard next door in Portugal, where loans to non-financial companies fell by 5% in the first quarter compared with the same period last year, and credit to households by 3.6%. One of the conditions of the country's bail-out programme is that banks should reduce their total loans to 120% of assets. The quickest way to do that is to avoid making loans.

Conditions are little better in Italy. The province of Varese, near Milan, is a manufacturing heartland: its factories make plastics, textiles and a range of engineering products. Once firms there griped about poor infrastructure and red tape; now the credit squeeze is their main complaint. The local bosses' association says that 40% of firms were hit by lowered borrowing ceilings between January and March, and 15% were told to pay back loans. Banks turned down 45% of requests for new funding.

France's Hollande defends early Afghan troop pullout

President Francois Hollande has defended his decision to end France's military mission in Afghanistan a year earlier than planned. Speaking in Kabul, he said some 2,000 French soldiers would be out by the end of 2012, leaving 1,300 other non-combat troops for an unspecified period.

"The mission of fighting terrorism and chasing out the Taliban is close to being accomplished," he said.

France faces criticism for pulling out before Nato's planned 2014 withdrawal. Hollande, who took office earlier this month, flew into Kabul and held talks with Afghan President Hamid Karzai before a joint news conference.

He was also due to spend time with French soldiers during his short visit. He was said to want to "explain himself" to French soldiers, and make the reasons for the decision clear to them.

Syria crisis: Homs fighting 'leaves 50 dead'

At least 50 people, including 13 children, have been killed in Syria's restive Homs province, opposition activists say, calling it a "massacre". They said scores were wounded in the violence in Houla, as government forces shelled and attacked the town. If the toll is right, it would be one of the bloodiest attacks in one area since a nominal truce began in April.

Meanwhile, UN chief Ban Ki-moon said the opposition controlled "significant parts of some cities". In a letter to the Security Council, Ban said the situation remained "extremely serious" and urged states not to arm either side in the conflict.