The finances
Football is, in theory, a rather easy business to run. Most of the revenues and the expenses are known at the beginning of the season. For the majority of clubs, revenues mostly come from stadium attendance, TV rights and sponsorships, all known well in advance. Expenditures are mostly wages, operational costs and amortization of players’ transfers, which are also known in advance.
So it should be easy: don’t spend more than you earn. But there is one small problem: data show that, on average and over the medium term, performance is directly linked to the wage bill. The market for players is quite efficient, with some exceptions (strikers tend to be overvalued and goalkeepers undervalued, as markets mistakenly price a goal scored higher than a goal not conceded). Spend more, get better players, win more games. The Spanish second division, where budgets are very similar, is a good example of this: the distance between relegation and promotion is just 10 points at the moment. The market for coaches is a bit less efficient – it is a very cliquey world with plenty of barriers to entry and, by definition, rather secretive methods. But there are very few coaches who can be said to have added value to their teams: Sir Alex Ferguson is one of the few, according to Stefan Szymansky’s ‘Soccernomics’ index. So the premise remains: spend more, do better.
At the same time, football presents discontinuities: do very well, qualify for the Champions League, and revenue prospects will increase more than proportionally. If managed well, this windfall can mean a quality quantum leap for the team, now able to consolidate its higher ranking with better players. Do badly and be relegated, and it is the kiss of death, as revenues collapse in a non-linear fashion. Recovering from this to return to the top league can be a very painful, arduous and slow process (on the few occasions that a club has managed a fast promotion back to the top it has been for teams adopted by a wealthy new owner who funded a bigger budget). And generating profits on a consistent basis is difficult, as weaker clubs constantly have to sell their assets (the good players they create in their academies) to be able to compete. In fact, few football clubs generate profits. For the majority, it is a question of running fast to stand still.
Spanish football clubs are also, in many cities, part of the cultural portfolio. Local politicians love to have a winning club, so that they can go to the VIP box on Sunday and mingle with the great and the good, and perhaps one day become president of the club and maybe even a celebrity. If there is a local bank, it is likely to be friendly to the club, providing credit to cover budget gaps. And if that credit is to sign a star player who can take the club – and hence the city – to the next level, how can the bank deny that line of credit, especially if there is valuable real estate collateral (stadium, training grounds, etc.) behind it. Some clubs are just too big to fail.
Does it sound a bit like banking or funds management? If it does, that’s because it’s very similar. You have an initial capital, make a portfolio allocation decision and hope for returns. If the returns are good, your capital allocation next year is higher, you can place bigger bets, make more money – it is a virtuous circle. If the returns are bad, your capital shrinks, you need to work harder, from a lower base, to return to your high watermark and be paid again. During boom times, leverage is easier to find, especially from local sources that are as bullish as you are, partly as a result of ‘groupthink’. Sometimes you think you can really take the bank to the next level by raising leverage and taking bigger bets, especially if volatility is low.
Spanish clubs were not excessively leveraged or inefficient, with overall financial ratios similar to those of Seria A or Ligue 1, and better than the English Premier League (although the EPL figures are distorted by Chelsea’s financial structure). But then a negative shock hit the Spanish economy, and it was downhill from there – first gradually, then suddenly, as the saying goes. This explains the recent history of many Spanish clubs. Some were heavily reliant on local sources, both regional governments and local savings banks, for funding and support. They relied on the eternal appreciation of their real estate holdings to support their leverage and climb the football ladder. A few were being managed in a not very professional way, with weak accountability. Like some Spanish savings banks.
When the crisis arrived, the support from local governments and local savings banks was suddenly curtailed, some sponsors failed and the expectation of appreciation of real estate holdings vanished.
All of a sudden, many Spanish clubs, like the Spanish economy, saw themselves in a financial crunch. Some new stadiums remained half built. At the same time, the FEF (Spanish Football Federation) toughened financial conditions on clubs, threatening to relegate some for lack of financial compliance. De facto, they put some Spanish football teams on a Troika-type program. The European Commission opened an investigation into state aid to some football clubs. The parallels between the economy and football are startling.
Clubs had to adjust and restructure rapidly. They had to cut wages, sell assets and reduce leverage. Many players have migrated to other leagues where salaries are higher and, especially, certainty of being paid is higher: below the top 10-15 clubs, arrears in salaries have been very common. The players’ association organised an unemployment assistance scheme, with training sessions and showcase games to help players to find jobs. Forced player transfers have been widespread, to reduce leverage – witness the flow of Spanish players migrating to the EPL. And not just the EPL, there are plenty of Spanish players in the leagues of Greece, Cyprus, Thailand, China, Bolivia, Israel, Azerbaijan and many other places. The diaspora of coaches has been as impressive, even if less well known, with Spanish coaches running teams all over the world, and not just the well-known cases of Guardiola at Bayern, Roberto Martínez at Everton, Rafa Benítez at Napoli or Michel at Olympiakos, but many others in distant places such as Canada, Australia, Bolivia, Colombia and Brazil. Like the economy, football had to rebalance via internal devaluation and boosting exports.
Corruption cases have been unveiled, with some club presidents resigning or even indicted, and not just among the lower tiers. The result has been a process of restructuring and recapitalisation of Spanish football, much like the banking sector or the economy.
Financial rules have been tightened, reforms have been implemented (for example, game times have been changed to accommodate Asian audiences, even if Spaniards don’t like to watch football in the middle of the day and attendances have fallen).
Imbalances remain, such as the very lopsided distribution of television rights that perpetuates the power of Real Madrid and Barça. But, like the economy, Spanish football has taken steps in the right direction.
Angel Ubide,
