I'm starting an IMC rating next weekend, so this is a well-timed thread! But, with no practical experience, here's a couple of snippets of theory for you:
First of all, as PhilD said, Mode C will not work if your static source fails. In fact, I'd have thought ATC will probably ask you to squawk Mode A only to avoid incorrect readouts.
Also, using a GPS for altitude sounds like a nice get-out-of-jail option. But remember that the altitude indicated on your altimeter won't be the same as the altitude your GPS shows you. It certainly won't be the same if you're flying flight levels, but even with QNH set, the GPS will show the actual altitude, whereas the altimeter will have errors due to temperature variations from ISA, regional pressure variations and so on. If everyone else is flying around on their altimeter altitudes, and you're using a GPS altitude, guess who's going to be at a different altitude to everyone else?
So, I think if this happened to me, my first priority would be to ensure that I was high enough not to fly into anything - set an attitude for a climb, and hold it for long enough to gain a couple of thousand feet. My second priority would be to tell ATC - they would hopefully get everyone else out of my way, including anyone on the airways above me if necessary. Even if I have a GPS, I'd still make sure that ATC know I'm not able to fly altitudes accurately.
What do the experts think about this? Does it sound reasonable?
FFF
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