I'm glad you were the one to point out that Krugman has become so fixated with denying the obvious that it has become embarrassing. Continually pointing out that Japan hasn't get gone broke isn't much of a defense when their economy - once the envy of the world - has completed two decades of stagnation and shows no signs of recovery.
Had Japan done a Iceland-style cleanout, they would probably be still striking fear into the hearts of governments and corporates everywhere.
Except for one complication. Japan's public debt is largely owed to it's own citizens, such a large proportion being internal debt. Even if they defaulted on the external component, they'd still have a problem of the type Iceland could avoid. Iceland wrote off banking debt, which was something like 70% of their external debt.
You're right, my language was imprecise, and I'm conflating two events. The Icelandic government declined to recapitalize failing banks, even when under enormous pressure to do so by the UK government and others. The pressure you may know was partly due to various local government bodies and other institutions having deposits with Icelandic banks.
Because the Icelandic government declined to act as insurer for those deposits, the insolvency of them was seen as an effective write off of national indebtedness to other sovereigns.
No problem. I just get worried that people hear about corporations or nations "writing off" debt and wonder why the system is rigged so they can't "write off" their own debts. Of course you can, as long as those debts are owed to you and not by you.
Had Japan done a Iceland-style cleanout, they would probably be still striking fear into the hearts of governments and corporates everywhere.