During the global financial tsunami triggered by the U.S. subprime mortgage crisis in 2008, Iceland was the first advanced country to receive a severe blow to its economy. Because of inappropriate monetary policy, high interest rates, banks’ overdependence on foreign currency financing and high financial leverage, Iceland’s banks accumulated huge foreign debt. When the eruption of the global financial crisis caused a credit crunch, Iceland’s banks were unable to finance repayment of their massive debts. The consequential bank failures plunged the national economy into deep recession. Since the banks’ foreign debts were too large for a bailout by the government, Iceland stood on the brink of national bankruptcy. Facing such a severe crisis, Iceland urgently took some non-traditional responsive measures, such as letting banks go bankrupt and imposing foreign exchange controls, in addition to accepting an IMF bailout and applying to join the EU. These actions served to rescue the country from economic and financial collapse. After a two-and-a-half year recession, Iceland’s economy began to recover. Many economists praised Iceland’s achievements in weathering so severe a financial crisis. This study examines the transformation of Iceland’s economic structure, analyzes the background and causes of its financial crisis, and surveys the actions and reforms taken to cope with the crisis. It concludes by drawing lessons and policy suggestions therefrom, to provide for reference by Taiwan and the debt-burdened European countries.