Shares in Gordon Brown (Titanic) Enterprises Ltd are sinking, as its debts grow heavier and the Jobcentre lifeboats fill. The decks are awash with newly nationalised bankers fleeing the City (or Reykjavik-on-Thames). Some say that the iceberg that sank Iceland is heading this way, ready to hole us with its toxic debt hidden below the water line. Having bailed out savers in Northern Rock, Bradford & Bingley and RBS, will GB itself end up having to be bailed out by the IMF? It would not be the first time.

This week, two gurus prophesied such an outcome. On Monday Jim Rogers, co-founder of George Soros's Quantum Fund, proclaimed that sterling was “finished” and that everyone should get out. On Tuesday, the hedge fund manager Crispin Odey declared Britain “bankrupt”. We can be pretty sure that both men are profiting handsomely by shorting, or betting against, sterling. But the nervy media gave their words considerable prominence, partly because a British bankruptcy is a ghoulishly fascinating possibility.

The parallels with Iceland are surprising. That country failed last year because its leaders ran large current account deficits, believed they had abolished boom-and-bust, and let their banks and households take on staggering amounts of debt. Sound familiar? Iceland's household debt was 200 per cent of its GDP last year. Britain's was 170 per cent. Iceland's banks became too big to rescue because their foreign debts alone were $120 billion, six times GDP. In Britain, the gap between loans and deposits held by banks grew from almost nothing in 2000 to £720 billion in 2008, or half of Britain's GDP. UK banks have £4,400 billion of assets on their balance sheets, or three times GDP.

Not all those assets are worthless, by any means. But losses still spook investors. On Monday, RBS announced the biggest corporate loss in British history. A vicious circle has taken hold in which sterling falls in value, amplifying liabilities, and bank share prices fall as liabilities mount. The lower our currency falls, the more it costs to service our debt. It's a sort of fourth circle of hell.

This gives the lie to Mr Brown's attempts to convince us that every part of the world is suffering equally from recession. As massive deleveraging takes place across the globe, with everyone trying to re- balance their books, it has become clear that the UK economy was one of the most overleveraged. Mr Brown's spending spree as Chancellor, and the remarkably lax regulation by the tripartite system he put in place, have left Britain particularly vulnerable. We are badly exposed to the withdrawal of foreign money because our banks were so highly geared and the country became so dependent on financial services. This is why the markets are so gloomy, and why the pound is being pounded.

But Britain is not Iceland. Iceland is the size of Coventry. Britain is the fifth-largest economy in the world (although it also has the third-largest current account deficit). The pound is still a reserve currency that people want to buy, despite the efforts of the speculators. We are bankrupt only in the sense that we could not pay if all debts were called in right now - which is true of many countries. A falling pound will be good for exports, assuming there is someone to buy them. The UK's credit rating was reaffirmed last week.

The only thing that could push Britain into bankruptcy would be a full-scale panic. So it is strange - and exasperating - that the Government keeps inadvertently fanning the flames of panic. Technically it has mostly made the right moves on the banks. The terms of its second bailout, announced this week, should have come as an immense relief to the City. But the scheme has been so bizarrely undersold that bank shares have now gone into free fall.

First, the bailout announcement was overshadowed by reports of Mr Brown's populist “anger” with the banks. This helped to spook investors into fearing that full-scale nationalisation is on the cards. That is precisely what Downing Street and the Treasury want to avoid, as the City Minister confirmed yesterday. But plummeting bank shares could yet make nationalisation a self-fulfilling prophecy.

Second, there has been widespread confusion about the terms of the scheme, partly because the Prime Minister spent time raging against the RBS purchase of ABN Amro. Calling it “ANB Ambro” was a forgivable slip. But the Prime Minister does not need to repeat old news that investors know. They need him to play up the banks, not play them down. Mervyn King, the Governor of the Bank of England, has sometimes made the same mistake. It is dismally counterproductive. We're all angry with the banks. But we need them to get back to health as fast as possible.

The result is that instead of welcoming the Treasury's huge new “asset protection” insurance scheme, which will insure banks against the worst losses, the market fears that this insurance will be made prohibitively expensive by politicians bent on revenge. The Government's refusal to announce the details of the scheme until the end of February - five whole weeks away - has created a dangerous vacuum filled by fear. The insurance scheme is the right answer to restore stability. The details are genuinely tricky to work out. But they need to be made clear next week, not next month.

The sad fact is that the Prime Minister seems to be playing the credit crisis as he plays everything else: for short-term political gain. While the Treasury tries to steer away from the rocks, his determination to score points risks steering it back again. It is surely not long before Gordon Brown (Titanic) Enterprises are bought out by Cameron Inc. But it would help if Titanic Enterprises is not by then in administration. That is a very remote possibility. But it is one that politicians might just blunder into, if they are foolish enough.

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