The economy is in a bad way and government finances are in an awful state, but let's get a sense of perspective. The City is not Reykjavik on Thames. Britain is not Iceland. Sterling has fallen a long way and may fall further. But Britain is not bankrupt.

British banks did grow too big for the economy, which makes us more vulnerable to the banking meltdown than the Americans. But it is nowhere near as extreme as in the case of Iceland.

The housing market here may be in a worse state than in America, as claimed by Jim Rogers, the US investor and former partner of George Soros. But the outlook is nothing like as dire as in Spain or Ireland.

The City will go through a terrible time, but the prospects for the German car industry look just as bad.

By international standards, Britain's government debt is not that high compared with the size of the economy, although the picture does change if all corporate and household debts are included.

Standard & Poor's recently reaffirmed Britain's triple A credit rating, just as it was downgrading Spain. And after the mauling the rating agencies have received, they are not in the business of giving anyone the benefit of the doubt.

If you believe the bond market, there are some countries in the danger zone. But they are those on the periphery of the eurozone.

According to investors, some euros are more equal than others and at the moment the only sovereign euro credit worth owning is the German bund.

The yield on the two-year bund fell sharply yesterday as investors fled to safety, but for the more exotic eurozone issuers credit is more expensive.

The difference between the interest payable on a ten-year Greek government bond and its German equivalent is now 2.80 per cent, while the same spread on Irish government debt is 2.73 per cent and for Italy 1.58 per cent.

So wide are these differentials that Jean-Claude Trichet, the president of the European Central Bank, was forced to rebuff questions in the European Parliament that some countries might be tempted to quit the euro.

For Ireland or Greece, the risks involved in quitting the club look much greater in the present circumstances than staying in, not least because abandoning euros would be treated by bond investors as a default. The real risk for Ireland, which is now guaranteeing bank debt several times the size of its economy, is that investors cease to buy Irish government bonds and that issuance becomes prohibitively expensive. What would then happen? Presumably, European governments would do anything to prevent a fellow member state from going bust and the ultimate embarrassment of an IMF bailout.

Britain does not have that alternative to the IMF, but it is hard to believe that we will need it. The hard to believe does happen a lot these days, though.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive