No tenemos dinero… Beneath the glamour Spanish football is going broke

by Kane Prior

Spain is currently in recession and facing an uncertain future. A decline in GDP last quarter of 1% follows an expected annual decrease this year of 1.6%. Spain isn’t doing as bad as Italy (who is expected to decline by 2.1%) and is nowhere near Greece’s level (who is set to decline for the 5th consecutive year) but fall much further in other measurements.

Unemployment in Spain is incredibly high, with nearly a quarter of the population out of work (surpassing even Greece) while their government boasts a budget deficit of 6.6% of GDP and has little hopes of bringing it back down to controllable levels.

The icing on the top is that long term government bonds (a nice way of measuring how secure the markets believe a country is) have had interest rates at around 7% for the last few months, the same level that caused Portugal, Ireland and Greece to accept bailouts from the rest of Europe as they couldn’t afford to borrow money with such high interest rates.

This is why many now predict Spain to become the next country to need a bailout. But what does that mean for their much lauded football league, one of the country’s most lucrative industries?

For the top two clubs, Real Madrid and Barcelona, arguably nothing. These two giants can boast the biggest revenues in the footballing world, with both earning more than €450 million in the 2010/11 season. More than ever the rest of the league has become a distraction for them, as they win by ever increasing margins and the title repeatedly ends up being decided by “el Clasicos”.

Their financial strength can be shown in Barcelona recently wrapping up a record breaking shirt-sponsorship deal and Real Madrid planning a $1billion dollar holiday resort in the United Arab Emirates, although Barça’s overall net debt still stands at over €300m.

Below Barça/Real, trouble

For the rest of the league cracks are starting to appear. Just a year ago, nearly half of the clubs in La Liga were still without shirt sponsors when starting the season, after companies entered offers way below the value of previous year’s deals.

Then there is the uneven TV revenue distribution which see’s the top two take the lion share of the revenue, leaving little room for change in the league. For example third place Valencia was estimated to earn less from TV revenue than an English club battling relegation from the Premier League last season, a sad state of affairs.

The debt levels in the league are too high as well; with overall debt totalling around €3.5 billion for the last 4 years (the highest of all the top European football leagues) while Spanish football debt coverage is the only level below 50% in the major leagues.

This has seen clubs like Valencia have to sell off its star players (David Villa, David Silva etc) just to lower uncontrollable debts of €382 million in 2010/11. This isn’t a one-off either; Malaga have shown the speed a club can go from riches to rags as they were forced into selling their star player – Santi Cazorla, after a cash crisis enveloped the club.

Other clubs don’t have the luxury of selling off expensive players, with Real Zaragoza, Real Betis and Racing Santander all entering the dreaded administration in the recent past. While Villarreal are also showing the economic effects of living beyond their means (with debt coverage at 22% during the height of their success), years of overachievement has seen the club collapse into relegation and have its financial future questioned.

More recently it has emerged that Spanish football clubs owe the government €752 million in unpaid taxes, with Atletico Madrid the worst offenders: €155 million in unpaid taxes. This has seen the national government and league governing body announce new rules to fix this mess, where over a quarter of club’s TV revenues could be set aside for unpaid tax payments. UEFA is also looking at witholding Atletico’s European prize money for failure to fulfil financial commitments.

This all has an effect on the clubs in question; net spending in La Liga this summer was down 70% on last season – €116m spent in total according to El Confidencial – 55% of which was covered in the transfer of three players (Alex Song, Jordi Alba and Luka Modric) alone.

No money more problems

The debt problem reflects the big economic problem in Spain, as collectively the nation spent far beyond its means for years without thought for the future. In fact while other countries like Greece can blame their government for handicapping their economy with uncontrollable debts, Spain actually had a budget surplus pre-crisis and still only has a public debt to GDP ratio of around 60%, lower than Germany’s.

Spain’s debt problems stem from private debt, as consumers and companies overspent (fuelled by a property boom) and left the country in debt to foreigners. Private debt alongside public debt accounts for 92% of GDP, among the highest in Europe and a major reason why the country may now need a bailout. A bailout would leave the country cut off from the international markets and under fiscal control from the likes of Germany and Central Europe.

Looking further down the road, if Spain were to need a bailout, it could result in a break-up of the EU. This would have wide-ranging consequences for Spanish football. Spain could require a new currency. Changes in visa laws and exchange rates would adversely affect players and employees. And changes in movement of labour and transfer dealings between clubs would alter dramatically.

Finally, if any potential EU break-up did prove messy, it could result in some clubs going out of business if they are forced by the government to pay their debts too quickly or experience a vast decline in revenue.

As extreme as that sounds, it is certainly a possibility. This sort of uncertainty can only harm Spanish clubs, as any serious investment is kept on ice until clubs can guarantee their futures.

Spanish football is currently experiencing both highs and lows, with the success of the national team and its two biggest clubs glossing over both the financial cracks in the system and the ongoing economic crisis faced by the whole country.

All hope is not lost though; UEFA’s Financial Fair Play rules and increased regulation by the Spanish football governing body could improve the finances of the country’s football clubs, while a more unified Europe is currently just as feasible as any Europe-wide break up. All it takes is a bit of acción!

Kane Prior is an Economics and Finance columnist for Just Football and runs the blog Economic Interests. Follow him on Twitter @econinterests

(photo credit: DenisSylvesterHerd via Flickr)

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4 Responses to “No tenemos dinero… Beneath the glamour Spanish football is going broke”

  1. Jonathan F
    September 13, 2012 at 3:17 pm #

    Another excellent financial review Kane. Some of the facts in this piece are startling, the minimal amount of spending by La Liga clubs this summer as stark an indicator as any of the impeding and ongoing financial strife in Spanish football.

    The question therefore is – is the bubble about to burst?

    • Kaneprior
      September 13, 2012 at 6:32 pm #

      Thank you Jonathan. Hopefully tv revenue can be redistributed more fairly in the future and the clubs can start to build up a fiscal wall to help ensure their long term survival. Europe wide caps on crazy salaries would help a lot of clubs I think.

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