1. A bad situation of extremely large and significant proportions.
2. A person of limited mental capacity, prone to doing idiotic things.
Examples of usage
'I thought the expenses scandal was bad enough, but when that cunt bought a duckhouse - that turned it into a serious Eyjafjallajokull.'
'George Osborne? 'Liability' doesn't even sum him up, the man is a Eyjafjallajokull for the Tories.'
From Icelandic. Roughly translated as 'enormously huge fucking fuck-up'.