The Financial Threat That Lurks Beneath The Spanish Football Boom
After the dominance of the Barclays/Barclaycard Premier League in the early to mid 2000's it seemed foolish to consider that La Liga could mount a strong enough challenge to compete with Premier League teams on a European stage. But as the remarkable Valencia/Deportivo/Zaragoza sides of the early 21st Century showed, it was possible to challenge Real Madrid/Barcelona and indeed showed it was feasible that someone outside of Catalonia/Madrid could fill trophy cabinets to the extent that those sides in particular did. But the consequences/legacy of such challenges to the power of Real Madrid/Barcelona? Financial ruin and instability for years to follow, Valencia are a perfect example who have been unable to reproduce the success Benitez had during his tenure now finding themselves in serious debt servicing problems forcing them last summer to sell their prized assets like David Villa/David Silva and downgrade the spending to bring in the likes of Soldado/Aduriz who are proven La Liga strikers. Their strategy is working in the medium term, they aim to have a sufficient 10 year plan in place by the end of this year which is less reliant on the Champions League income (which is the main source of income for them right now) and move towards stability and producing gems like they have done in Juan Mata/David Villa who were brought to the club for relatively nominal fees. That strategy is quite a financially brave strategy in Spain as the culture/trend of La Liga is leaning ever more to the ways of the Barclays Premier League where clubs spend more than they earn and end up in severe non structured debt through poor management at the top level leaving them vulnerable to administration/relegation. The trend set by Hercules/Mallorca in the past two seasons should serve as a stark warning to mid-lower teams in La Liga who must now realise that spending what you do not have in the summer just threatens your ability to service expenses/costs such as wages, operating costs and renting of facilities throughout the season. The extreme examples of clubs being financially mismanaged in recent seasons has already led to Deportivo and Hercules go down and Mallorca/Racing's futures put in severe doubt, surely this should serve as a warning not a precedent that is to be followed?
Of the teams promoted to La Liga this season, Real Betis, Rayo Vallencano and Granada are all in administration. Real Mallorca went into administration last season and were banned from playing in the Europe League. Real Zaragoza applied for voluntary administration last month, whilst Racing Santander are struggling to pay off their debts. Spanish regional banks have been in trouble and the country's construction bubble has burst leaving unsold and half completed apartments and many construction workers adding to already high structural employment. Spain could be hit hard by any contagion effect from a Greek default and already indebted football clubs could be flattened by the financial tsunami.
According to article 93 of law 35, originally introduced by the previousPartido Popular government in 2004, foreign executives earning more than €600,000 (£540,000) a year are taxed at 23%, rather than 43%. In theory, the aim was to encourage talent to come to Spain: in practice, following a modification in 2005, it gave Spanish football clubs, already boosted by the collapse of the pound, a huge advantage. Of every 60 people who qualify for the lower rate of tax, 43 are footballers. Luckily the absurdity of the law has recently been altered by the government meaning even foreign football players in Spain are taxed 43%.
But when the league is headed by two clubs who hold the spending power of Real Madrid and Barcelona who have the capability to splash the income of most Spanish clubs in a single transfer surely the reality is that clubs will never hold any chance at winning the league?
In 2008/09 season the €455m net La Liga transfer spend disguises a troubling reality. Last year, despite winning the treble, Barcelona made only €8.8m and have a debt of €350m. Madrid signed €258m worth of players but only after their president, Florentino Pérez, turned to two friends who are both presidents of banks and who loaned Madrid €151.5m. Which I often refer to as the true fault with Spanish football, the clubs/presidents mismanagement and personal connections with banks leads clubs down the path of borrowing...But when that presidents time comes and a new President is elected the clubs debts/bonds/loans are all still held by the same bank executive that the old President struck a deal with and who may want to up the interest/call in the loan.
It is such a short sighted short term strategy taken by alot of Spanish clubs because the power hungry Directors/Presidents are all too happy to sit in their ivory towers and building the team behind the scenes but when things go wrong they divert the heat onto the manager and 9/10 they sack the coach. Utter madness that you consider clubs to have 2-3 year financial plans, the club will never be stable and hold sustainable growth as long as Presidential terms/elections exist in Spanish culture.
The argument is that their debts are serviceable. In fact, Pérez insists that high expenditure is necessary to generate money and Madrid have become the first club to take income beyond €400m. But doubts remain; costs outstrip income, shirt sales are lower than those of Liverpool and Chelsea; Bernabéu attendances are down 7%; and the debt stands at €683m. Publicly, Pérez insists: "Madrid must always remain a club owned by its members." The possibility of Real Madrid becoming a plc has even been discussed. Unthinkable as it sounds, the comparison of the Glazers-Perez is a very short run contest in my wholly honest opinion as to who's strategy makes more sense because the Glazers borrowed 80 pct of funds against the football club...In order to buy the football club, and their idea was to service the ludicrous debt by structuring it annually with high interest whereas Perez just seems to be relying on Shirt sales/Marketing strategy to pay back his loans. But would that solve anything? The evidence suggests not. In the early 1990s, a new law obliged every club to become a plc, with four exceptions – Real Madrid, Barcelona, Athletic Bilbao and Osasuna, who were given special exemptions for socio-cultural reasons. Shares were issued and the slate wiped clean. It was supposed to be a panacea. The theory was simple: presidents would be more careful risking their own money. They were not. Often their fans would not let them...
Look back over the clubs who have competed in the Champions League recently and the situation is alarming: Valencia's debt is more than €600m. Like Real Madrid (who sold the their training ground for €447m to the council in 2001, wiping out their €278m debt), a property deal was supposed to be their salvation. However, the market crashed at just the wrong time. Now Valencia have two stadiums – one they cannot sell and another they cannot afford to finish building. According to the third largest shareholder at Atlético Madrid, their debt is above €300m. Villarreal have just failed to pay their players for the first time because the ceramics industry from which their owner, Fernando Roig, makes his money has been hit hard by the crisis. Deportivo La Coruña are more than €120m in debt. Mallorca are desperately seeking a buyer and preparing for administration. Celta Vigo and Real Sociedad have been relegated and, with no parachute payment to break the fall, went into administration. Real Sociedad's president at the time was a certain Astiazarán, now the league's president. This culture needs to stop, it will strangle the longevity of La Liga's ability to challenge and grow as a worldwide domestic competition
According to the latest Deloitte football finance report, La Liga's revenues grew by 8 per cent to €1.622m in 2009-10, the highest relative and absolute growth of any of the 'big five' leagues. However, much of the growth was driven by Real Madrid and Barcelona whose collective revenues increased by €69m. Which clearly show's the unjust imbalance of TV rights/revenue proportioning that go on within the La Liga dividends and the facts are that policies in Spanish football are often driven by the 2 powerhouses of Real Madrid and Barcelona. According to reliable statistics Madrid have 13.2m fans while Barcelona have 10.4m. Valencia are third with 2.1m. Nearly two-thirds of all football fans in Spain support one of the big two. And supporters of other clubs almost invariably choose Madrid or Barcelona as a "second" team.
Their dominance is felt most on the TV revenue side– and that is the crux of the issue, the precarious foundation upon which Spanish football is built. Unlike elsewhere – and even Italy is going collective – Spanish clubs negotiate individual television deals. "The lack of a centralised deal is the biggest problem we face," Tebas says. The reason is clear. Madrid and Barcelona will earn approximately €120m in rights each year until 2013. 09 season's third-placed side, Sevilla earn around €20m; Valencia, last seasons third, make under €30m – less than Portsmouth. Right throughout the league, the imbalance is extraordinary. Competing is impossible.
The problem is the league are powerless to impose a collective deal, although they continue trying. There is so many splits of opinions that it is impossible to get unanimous agreement on anything in the way of legislation. Your probably thinking ''isn't that the main reason blocking SPL reform at the minute?'' Yes.
There is a lot of talk about Premier League debts, but this is a much more serious overall situation, particularly when one considers the state of the Spanish economy. You have to ask yourself, where is La Liga's long term strategy/policy heading?
09/10 Figures Compared To The Barclays Premier League, The Revenue/Spend Is A Terrifyingly Obvious Precedent That Clubs Set That Summer That Followed In The Summer Of 10 With The Likes Of Hercules Spending Large Amounts Of Money It Simply Did Not Have The Capacity To Re Imburse Throughout The Season..
Part one of a series analysing Spanish Football and it's Financial structured, next piece is on TV rights and the 'top 2' domination of that field along with a summary of La Liga's ''attempt'' last season to entice Asian audiences with an earlier kick off that ended in what I can only describe as a 'dud' of an encounter. Followed by a look at the strategies La Liga clubs can use/are using to catch the top 2, examples involved in that analysis include Villareal's strategy and the Malaga strategy.
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