By Kathleen Brooks, Research Director UK EMEA, FOREX.com

The main event this weekend was supposed to be the Franco/ German summit in Berlin; however this produced nothing more than another pledge to do everything possible to save the Eurozone in its current form. You wonder why Nicolas Sarkozy had to fly to Berlin leaving his heavily pregnant ex-supermodel wife at home; surely both Merkel and Sarkozy could have issued a joint statement that was then released via their respective press offices?

Far more interesting was news about Dexia. After a weekend board meeting that included Belgian and French officials, it was announced that Belgium would spend EUR4 billion to buy its retail banking arm, thus effectively nationalising the stricken lender that has had to be bailed out twice in the last three years.

But Dexia could be the straw that broke the camel's back for Belgium. Brussels' credit rating was put on negative watch by Moody's on Friday, and for a country with GDP of approx EUR400bn and a public debt ratio knocking on 100% of GDP, a bank bailout couldn't come at a worse time. Welcome to the new normal: sovereigns in the West can't afford to bailout their weak banks and when they do it threatens to de-stabilise their credit ratings. So France got off lightly? Not quite. Dexia was a big lender to French municipalities and local councils, who borrow about EUR20 bn each per year (according to an article in the FT) so the French government is trying to hurry along a deal that would see a Treasury department and the Post Office bank to try and avert a funding crisis next year. Increasingly Sarkozy is needed at home, not only because of Carla's delicate state, but also because major cuts to public services would be detrimental to his 2012 re-election campaign.

There were a few other things that caught my eye about the Dexia saga and the plan to sell off other assets and end up with a EUR100bn "bad bank". Firstly, according to the FT report, some French muni debt that is already toxic will end up in said bad bank. Secondly, the sheer size of it. I am no banking analyst but there are plenty of other lenders out there who specialised in muni lending across Europe along with some of the region's largest banks that hold huge amount of domestic government debt on their books. So bank re-capitalisations could also be far larger than the EUR 90 billion I have heard bandied about recently.

The only concrete things that came out of the Merkel/ Sarkozy meeting was 1, that a package of reforms to save the Eurozone will be ready by month-end and 2, that bank re-capitalisations are necessary. However, who can pay for them? France has already backed away from injecting cash into Dexia for fear of losing its AAA credit rating. We don't yet know if the EFSF will be allowed to leverage-up so it can do the job. So there is plenty for Europe's politicians to chew over and the markets to speculate on and this crisis still has the ability to disrupt the positive tone to markets.

Those who thought the Eurozone crisis was over the worst were dealt a blow on Friday evening UK time when Fitch came in and ruined everyone's attempts to get away early and downgraded Spain and Italy. Spain was the bigger shock, however it was all the result of the banking sector. The state took ownership of a further four Caja banks last week, which will inevitably dent its finances. Add to this rising unemployment and you have the recipe for higher bond yields and CDS spreads when we head in on Monday.

It is hard to see an environment where the euro can sustain a steady rally and we may see it dwindle back towards the 1.3200 mark on the negative outlook for governments as they embark on mass bank re-capitalisations in the currency bloc. But what is bad for the sovereigns is good for the banks? Could we see bank stocks continue to rally even if their financial needs put their governments' credit ratings at risk? Stranger things have happened, so all eyes will be on sovereigns and stock markets come tomorrow morning, especially since banking stocks have led the overall markets higher and lower in recent weeks.

The risk is that now the ratings agencies are scrutinising sovereign balance sheets it won't be long before France and the UK get downgraded, which could set off another bout of market volatility.

There were some interesting stories in this weekend's papers. Italy's perilous state was amplified by news that it had asked the British air force, the RAF, to leave one of its bases, which had originally been offered as a re-fuelling post en-route to missions in Libya. The reason was that it couldn't afford the lost landing fees from commercial jets, so the UK has until Thursday to move operations to Sardinia.

The UK Sunday papers were also digesting the latest round of QE. The Sunday Times was fairly scathing in its view that more QE will hurt pensions rather than boosting economic growth. That may be a reflection of the demographic that makes up the bulk of Sunday Times' readers, but with inflation at 5%, QE has received a fairly chilly reception by the UK press all round. The editorial in today's Times suggested that waiting for the government to embark on its plan to restore growth is turning into something from Waiting for Godot. Not exactly damning at this stage, but if Osborne doesn't act quick his policies will be subject to more than the odd sarcastic literary reference.

Some of you may notice this is a bit later than usual but I wanted to wait for the tete-a-tete between Merkel and Sarkozy to come to an end before I gave my weekend musings. Added to that, I needed to do some research for IN (impending nuptials) that is both incredibly time consuming and also strangely addictive.

Ahead this week, watch out for US retail sales and Fed minutes. In the UK labour market data will be the key release and in the Eurozone it will be industrial production and the final reading of CPI data for September that will dominate the calendar. Also watch out for Slovakia ? one of the newest, smallest and poorest EZ states is holding out on passing the changes to the EFSF agreed in July. If it doesn't get through the Slovakian Parliament then the EFSF may not be extended to EUR 440bn, which is already deemed too small. Yet again, the Eurozone proves it works in mysterious ways...

The views expressed are the author's, not FNArena's (see our disclaimer).

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that FOREX.com is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. FOREX.com is regulated by the Commodity Futures Trading Commission (CFTC) in the US, by the Financial Services Authority (FSA) in the UK, the Australian Securities and Investment Commission (ASIC) in Australia, and the Financial Services Agency (FSA) in Japan.