The capitalist pig has returned to Riga. Rosy-cheeked, fat and with a briefcase full of workers' cash clasped between his trotters, he stares out greedily from a placard opposite the Latvian parliament on the capital's main boulevard. Next to the hoarding, unemployed men in balaclavas and worn anoraks huddle around a fire.

As little as two years ago, any public display of such anti-capitalist clichés would have been considered madness in Latvia: after shedding the Soviet yoke nearly two decades ago, the country enjoyed an economic boom But the party is long over.

Latvians such as 33-year-old Gints Berneckis have lost their faith in the Western economic model. In common with thousands of others in Latvia, where unemployment is now 23%, he was made redundant from his job as a computer salesman last year.

"Yes, the capitalist pigs are back and they are walking off with our money and the government is handing it to them," he scoffed.

He has been camped out with fellow demonstrators braving Latvia's worst winter in decades in a small tent city in front of the parliament since the beginning of the year.

"Everything is being cut – social security, education, pensions – and people are leaving en masse," he said.

The crisis peaked two years ago when the government was forced to take over the country's second-largest bank to prevent it from collapsing. Ever since it has teetered on the brink of bankruptcy.

Latvia applied for and was granted a €7.5bn rescue package from the International Monetary Fund and the EU. But the conditions imposed have obliged the government to usher in draconian belt-tightening measures which aim to slash the deficit from 12% of gross domestic product to 3% by 2012. Tough spending cuts and tax increases have been the order of the day.

Between 2005 and 2008 Latvian salaries doubled and borrowing grew by about 60% each year. Both developments fuelled a massive economic bubble that earned the country a reputation as the 'Baltic Tiger'. But in 2008 the bubble burst dramatically. Property prices plummeted and consumer spending collapsed. Huge Swedish investments in building projects dried up and unemployment rose to the highest level ever experienced by an EU member.

Latvia's economy shrank by nearly 17% during the last quarter after retail sales dropped by a third. Yet the government maintains it plans to introduce the euro in 2014.

"If it wasn't for the IMF and the EU, Latvia would now be completely bankrupt," said Jens Fischer, a Riga-based political and economic analyst. "But it's not like Greece – the people have seen worse times during the Soviet era and don't complain. There is also a big grey economy which remains unseen but keeps people ticking over."

Even so, beggars abound in the restored 14th-century centre of Riga and most of the smart Western shops that set up in the city are empty. In a bid to enhance Riga's trade in 'stag night' tourists, the government last week passed a bill to cut VAT for hotels. The trouble is it threatens to undermine the terms of the IMF rescue package.

The dire state of the economy has also inflicted its first serious wounds on the Latvian government. Last month, prime minister Valdis Dombrovskis was left searching for new political partners after his coalition collapsed following a walkout by the five cabinet members of the influential People's Party.

"It is not very pleasant for a country to have the IMF," Dombrovskis said recently as he glanced over his shoulder towards Greece. "But once a country has come so far that it needs a lender of last resort, it cannot be too pleasant."