The Real Madrid Revolution – Glamour, Galacticos & Unlimited Gold

Just-Football is delighted to welcome aboard new columnist James S. who for his first team debut analyses Real Madrid, their unique financial situation and their illustrious position in world football. Where do they get all that money?

Barcelona may have just completed a historic treble but the hot topic of conversation in Spain’s La Liga right now is: what are Real Madrid going do to ensure this never happens again?

Unless you have been sleeping under a rock for the last few weeks, days after splashing out a world record £56 million on Kaka we finally know how much a virus costs according to Sir Alex Ferguson. Florentino Perez and his fellow Real Madrid directors agreed a mind-numbing figure of £80 million to secure the transfer of Manchester United forward and current World Player of the Year Cristiano Ronaldo.

Some would say that this is all the proof you need that Real Madrid are indeed the biggest club in the world and thus the best players in the world should be playing at the Santiago Bernabeu, no matter the price. What player has left Real Madrid to join Manchester United in his prime? On the other hand, Manchester United legend and current director Bobby Charlton refers to the fee as ‘vulgar’ whilst Barcelona directors go as far as linking Real’s transfer policy is to ‘imperialism’.

Clearly Real Madrid do not generate the majority of their money from within through profit, like an Everton for example or, dare I say it, a Barcelona. Joan Laporta recently went on record to say, “We have different cultures. We prefer to act with common sense and not spend more money than we have.”

So the question that needs to be answered here on Just-Football is just how and more importantly why do Real Madrid get all this money?

Loans

Spain’s fourth largest building society Caja Madrid has agreed to loan €76.5 million Euros to Real Madrid, who have put up two undisclosed sources of collateral, and Spain’s largest bank, Banco Santander, has agreed to lend them a similar amount. Interestingly enough, Catalan savings bank la Caixa was rumoured to have supplied €57 million Euros so that Perez could stand for the presidency in the first place.

Caja Madrid’s profits fell by 71% last year but they have still managed to lend Real a huge sum of money. Spain’s Economy and Finance Minister Elena Salgado went on record by saying:

“It surprises me, and what I would ask banks is that, if they have liquidity, they also make loans to small and medium-size companies and families. I would ask that they make an effort for them.”

As the saying goes you have to speculate to accumulate and Perez underlines that: “this is a corporate project and some investments (in players) are necessary, and those who see it differently are misguided.”

Sustainable debt

In fact Perez is adamant that these purchases will not burden Real with a huge amount of debt. When talking to La Gazzetta dello Sport, Perez spoke of his three goals that can only be achieved through Galactico signings:

1. Increase tickets sales
2. Increase bank loans
3. Increase Real’s economic value as a whole.

A study by the International University of Catalonia claimed Real Madrid lost up to €45 million Euros in annual revenue when David Beckham left the club for the USA, so there is no doubt that there is some effectiveness in this policy as long as Ronaldo keeps his good looks and Kaka keeps his faith in Jesus.

Florentino Perez goes on to clarify that “Real Madrid takes about 400 million euros a year, the fruit of three sources of income – a third from ticket sales, a third from television rights and a third from merchandising.” In 2006 Real signed a seven-year individual television deal with Mediapro worth roughly 1.1 billion euros.

The player cull

Jorge Valdano has repeatedly warned Arjen Robben that he should consider offers to leave Real this summer and it seems that Real Madrid are keen to recoup a lot of money by selling half of last season’s squad. Rumour has it that Real offered nine players to Premier League clubs by fax and the Dutch contingent are said to be under the most threat.

However, Los Merengues will have to take a hit on these players. Arjen Robben, for example, cost Madrid €35 million Euros. It would be impossible to sell him for this price. You can say the same for Gabriel Heinze (€12 million Euros), Royston Drenthe (€14m), Mahamadou Diarra (€22m), Rafael Van der Vaart (€13m), Wesley Sneijder (€25m) or Ruud Van Nistelrooy (€15.5m). All of them have a few years left on their contracts and Perez admitted during his campaign that Real will have to accept huge losses. So while this money is by no means crucial in Real’s financial plan, these sales would balance the books ever so slightly.

The moral hazard

So this brings me to the main reason why Real are so powerful. As the saying goes Barcelona is ‘much more than a club’ but do not for one minute assume Real Madrid is any different. Real Madrid is Franco’s team, the King’s team, the team that represents the status quo in Spain. The powerful institutions in Spain will always back Real Madrid to the hilt just to show that the real power in Spain lies in Madrid and not within the autonomous regions. Barcelona doing the treble has only strengthened the desire to assert Real’s dominance. Football and politics are by no means mutually exclusive when it comes to Madrid vs the rest of Spain.

All of this means that Real Madrid can definitely justify spending this money. They will never go into administration or out of business. It is not as if the Sword of Damocles is hanging over the club’s existence every time they lavish millions on players. Real Madrid is the biggest club in the world because it can spend and borrow at will and as a result no player really leaves Real in his prime.

In 2001 to finance the first Galactico spending spree, Real Madrid sold part of its training ground to the City of Madrid council. The rest was sold to big Spanish corporations such as Repsol, Mutua Automovilística de Madrid, Sacyr Vallehermoso and OHL. With this huge amount of money, Real went on a huge transfer spree and were able to move into a state of the art training complex on the outskirts of the city. Florentino Perez must have a lot of charm!

The moral hazard on this occasion however lies with the banks. The love of all things Real Madrid that means the big banks have been more than willing to expose themselves to huge amounts of risk.

As I write this Zinedine Zidane has been quoted as saying that he is ‘doing all [he] can to get this move done.’ The player in question is Franck Ribery. Which bank is putting the money up this time? How will they market Ribery if they get him?

Regardless, one word that seems to be missing from all of Perez’s grandiose quotes is ‘trophies’ and it will be interesting to see how Real’s 2009/2010 season unfolds both off and on the pitch. The first ever Saturday Champions League final beckons and will be played at (yes you guessed it) the Santiago Bernabeu. This is perhaps the ultimate justification of how and why Real have gone on this spending spree.

To put it simply the Real hierarchy has to make sure that they have a team that can win a tenth European Cup, if only to make sure that Barcelona do not walk away with their fourth title in Real’s backyard instead. No future spending spree would be able to erase the picture of Carles Puyol lifting the Champions League trophy in the heart of Spain. That would be he ultimate slap in the face to the great institution that is Real Madrid.

JS

Cristiano Ronaldo, Europe, Football and Finance, Money Money Money, Real Madrid, Spain, Spanish Primera Division, Writers - James Sullivan