Well, I've only been in Iceland once, so I don't know much, but I can paste something about staying warm in a squat from another post... Anyway, onwards to some tricks for squat winter survival: Squat candles are the easiest thing you can make aside from an open fire. It's basically a tin crammed with cardboard and paraffin wax melted in, and it burns mostly vaporized paraffin. You can use that to heat up water to put into bottles that you can put in your sleeping bag, and that will keep you as warm as a fire without the risk of burning down anything. Scrunched up newspaper can be put into your clothing and bag (it's noisy though) and cardboard is a nice mattress, and if you find a large enough box, a mini-room.
okay, now just remember that insulation you scrounge up tends to be flammable, so it's a bad idea to have a fire or squat candle going unattended. At the very least a chalkboard or piece of sheetmetal or a cookie tin or something unburnable should be put under one that doesn't have a lot of your attention. But remember people tend to notice the flickering light. Pallets can also function as a framework for insulation, since you can cram newspaper (or in moist places, plastic bags) and you can string them together to make a small space. They're also great for raising you off the ground if the floor is wet. Watch for poking nail heads though, since they'll rip holes in sleeping bags and pads. If you have a ridiculous number of blankets, it's a good idea to use corrugated cardboard as a spacer, that way air is trapped between the layers and it'll be warmer. Trash bags filled with newspaper make nice blanket forts with a cardboard roof support. If you have a friend or access to a place with a microwave, you can heat up your water there instead and not even have to make a fire. Piss bottles can also keep you warm if it's really cold out, but keep it in a container that you will never mistake as a water bottle.
There are other materials that may function well here, I don't know if there are milk crates in Iceland, but those can be stuffed with newspaper/bags and ziptied together to make simple structures, but getting that many will probably require a good deal of help.