Enforcing moral hazard the Icelandic way (though Ireland may have better longer term prospects)…

There’s a good piece in the San Fran Chronicle which compares Iceland’s handling of the debt crisis favourably with the US’s. It doesn’t say it, but you might also compare it unfavourably with the Eurozone’s mishandling of its crisis too.

Iceland’s special prosecutor has said it may indict as many as 90 people, while more than 200, including the former chief executives at the three biggest banks, face criminal charges.

Larus Welding, the former CEO of Glitnir Bank hf, once Iceland’s second biggest, was indicted in December for granting illegal loans and is now waiting to stand trial. The former CEO of Landsbanki Islands hf, Sigurjon Arnason, has endured stints of solitary confinement as his criminal investigation continues.

That compares with the U.S., where no top bank executives have faced criminal prosecution for their roles in the subprime mortgage meltdown. The Securities and Exchange Commission said last year it had sanctioned 39 senior officers for conduct related to the housing market meltdown.

The U.S. subprime crisis sent home prices plunging 33 percent from a 2006 peak. While households there don’t face the same degree of debt relief as that pushed through in Iceland, President Barack Obama this month proposed plans to expand loan modifications, including some principal reductions.

According to Christensen at Danske Bank, “the bottom line is that if households are insolvent, then the banks just have to go along with it, regardless of the interests of the banks.”

But then there is the small matter of not belonging to a currency union… Defaulting on bad debt is a hell of a lot easier if you don’t have to bust your currency with the wider world…

Adds: H/T Simon Nixon: Ireland may be better off in the longer run…