Can Football Kick Its Addiction To Debt?
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Spiralling wages and transfer fees have submerged Europe’s football teams in billions off debt, and the sport’s governing body seems helpless to do anything about it.
In a reflection of the wider crisis of Western capitalism, Europe’s football clubs are plunging further and further into staggering levels of debt. A recent UEFA study of 650 European clubs showed that 56 percent lost money in 2010 and that collective losses added up to more than US$2 billion (€1.64 billion).
Spiralling wages and transfer fees have submerged Europe’s football teams in billions off debt, and the sport’s governing body seems helpless to do anything about it.
In a reflection of the wider crisis of Western capitalism, Europe’s football clubs are plunging further and further into staggering levels of debt. A recent UEFA study of 650 European clubs showed that 56 percent lost money in 2010 and that collective losses added up to more than US$2 billion (€1.64 billion).
This put their total debt at US$10.9 billion, a figure which is likely to have risen steeply in the past year. Annual losses rose 36 percent in 2010 – about US$520 million – on 2009’s figures.
The losses are all the more striking because football’s popularity has never been greater and the top clubs are generating enormous revenue from ticket prices, merchandising, and TV rights. Revenue for European top-tier clubs soared 42 per cent between 2006 and 2010. Total revenue climbed 6.6 percent to US$16.16 billion between 2009 and 2010.
With so much money coming in, how is it that Europe’s football clubs are so much in debt?
Bernd Frink, a Professor of Economics from Paderborn University, said the problem was sheer financial incompetence which resulted in colossal overspending on salaries, staff costs and transfers.
[quote] “There is a paradox. These businesses are raining money, yet most are still in the red. If they paid half of the annual salary to the management that they pay to their players they would attract people with competent business skills to run the clubs.”[/quote]The leagues with the greatest debt are England’s Premiership and Spain’s La Liga. In Spain, according to a 2010 research by Professor José María Gay of the University of Barcelona, clubs in the top La Liga divisions were €3.53 billion (US$4.63 billion) in debt. Labour costs – mainly astronomical player wages – made up 85 percent of operating income.
English Premier League clubs’ net debt in 2010 was £2.6 billion (US$4.1 billion) and the aggregate net debt of Championship clubs – a rung below – was £875 million (US$1.39 billion). The 92 Football League clubs together had debts of £3.5 billion (US$5.5 billion).
Two legendary English clubs, Liverpool and Manchester United, saw their finances nosedive after takeovers by US investors.
American venture capitalist Malcolm Glazer bought Manchester United in 2005. The majority of the cash used by Glazer to purchase the club came in the form of loans, much of which were secured against the club’s assets, incurring interest payments of more than £60 million (US$95 million) per year.
The Glazer family charged the club US$20 million in fees to compensate them for running it, according to the Guardian newspaper. In other words, for the privilege of being owned by the Glazers, Manchester United pays the family millions in salaries.
Meanwhile, US venture capitalists George Gillett and Tom Hicks bought Liverpool in 2007 and within three years the club’s loans had reached a level described as “toxic” by the Royal Bank of Scotland. The pair was forced to sell to the American sports investment group New England Sports Ventures in 2010.
[quote]“Despite the massive debts incurred by clubs across Europe, there is no real bankruptcy risk for a big club similar to the risk faced by regular companies in the machine tool, or chemical industries,” said Frinck. [/quote]For example, Manchester and Liverpool are such iconic clubs, Frinck argues, that they will always be bailed out by either a foreign mega-capitalist, or rich local businessmen. Annual revenue is large enough to service the interest on the debts even if it means restrictions on spending.
The problems are felt more intensely at the tier below a Manchester United, or a Madrid. “Clubs like Valencia in Spain, or Newcastle in England are desperately trying to keep up with the Manchesters, or the Madrids, who have greater financial clout,” he said.
[quote]“Everyone is desperate to qualify for the Champions League which provides a minimum of €7.2 million and €31 million for the winner. They all want to get their hands on this ‘jackpot’ money and it makes them behave irrationally. They will spend a fortune on transfer fees and wages to try to get into the Champions League.” [/quote]Some of the top English clubs are owned by “sugar daddies” who have such enormous reserves of cash that they can wipe out a club’s debt overnight and spend vast sums on buying the best players. The sugar daddies are a different breed to the venture capitalists who have to turn a profit and show a modicum of restraint.
Chelsea’s owner, the Russian multi-billionaire Roman Abramovich, has bought so many world-class players since he arrived in 2003 that he has catapulted the club into the forefront of European football. Abramovich wiped out Chelsea’s US$65.1 million operating loss in 2011 with a flick of his pen.
The Abu Dhabi United Group took over Manchester City in 2009, and all of a sudden the club was able to spend more on players than any Premier League club. Like Chelsea, City’s fortunes were transformed and they have become a serious threat to arch rivals Manchester United.
The Group’s owner, Sheikh Mansour, showed even greater generosity than Abramovich in 2011 when he wrote a cheque to clear City’s US$164.5 million operating loss.
“The sugar daddies exert a damaging inflationary effect on football’s wages and transfer fees,” said Tom Cannon, a Professor at the University of Liverpool Management School, and an expert on sport finances.
“Premiership football has had three big boosts to inflationary pressures. First, there was multi-millionaire businessman Jack Walker who took full control of Blackburn Rovers in 1991. He was a lifelong supporter with loads of money and he bought players like Alan Shearer which the club could previously never have afforded. Now we’re got foreign owners like Abramovich and Mansour. The problem is these businessmen have resources other clubs don’t have, but the other clubs feel they have to spend more to keep up.”
[break]The Sugar Daddies & Venture Capitalists Are Taking Over Football
Cannon says it is surprisingly easy to gain control of an English football club, which is one reason clubs find themselves trapped in exploitative situations.
[quote] “Foreign owners buy English clubs because our company law makes it easy to acquire British companies. We’ve seen the same thing with British engineering, car manufacturing, confectionary and finance. The American company Kraft bought out Cadbury and took on a lot of debt to finance the deal. The same thing is happening in English football.”[/quote]“In Germany, supervisory boards would make it almost impossible for Kraft to buy a German confectionary company, and German law also protects the country’s football clubs.”
All German football clubs must have at least 51 percent member ownership, Cannon adds. This prevents the sugar daddies and the venture capitalists marching in and taking over.
The consequence is a more regulated and efficient system. In the German Bundesliga, 36 clubs in two divisions shared record turnover of US$2.89 billion in 2011, according to the league’s chief executive Christian Seifert. The 18 top-tier clubs earned a combined US$68 million in profits, after agreeing to cost-cutting measures in August 2010, which have reduced overall debt to US$769 million.
[quote]“The German league is doing very well compared to all the others in Europe,” said Frinck. “It has the second biggest aggregate revenues after the Premiership and a negligible debt load compared to Spain, England and Italy. Attendances are good and TV contracts have caught up.” [/quote]Average salary in the Bundesliga first division is €1.5 million, which means clubs spent close to €800 million on salaries last year. This is low compared to England, but still higher than the average in Italy and Spain, where the leagues are dominated by two, or three, clubs playing extraordinary wages.
[quote] “If you look at the bottom of the Spanish and Italian leagues, the average wages are nowhere near €1.5 million. In Germany we have guys earning 8 or 9 million, but the wage structure is more compressed than in the other three countries. Of the German clubs, only Schalke 04 has a very significant debt load,” he said. [/quote]Frinck says there is no hope of introducing a similar structure at English clubs, where the tradition of private ownership goes back to the 19th century. And he is also utterly pessimistic about the chances of new UEFA legislation having a positive effect on controlling excessive spending.
Under UEFA’s Financial Fair Play (FFP) rules, any club posting collective losses of US$58.5 million, or more, over a two-year period will be subject to penalties which limit its spending and buying abilities. The clubs could also be excluded from the lucrative Champions League and Europa Cup competitions.
Yet a loophole remains: From 2011 through 2014, clubs can rack up US$57 million in debt, as long as one owner takes shares in the club in return for the money. From 2014 to 2017, US$38 million more can be overdrawn on the same terms. It is not until 2018 that clubs have to bring their annual losses below £8.8m (US$14 million).
“In theory, the sanctions should have an affect, but UEFA won’t enforce them,” said Frinck.
[quote]“Can you imagine them kicking out the English champions from the Champions League because they have violated these regulations? There’s no way that will happen. The clubs will find loopholes and UEFA will let them do it.” [/quote]Frinck said Manchester City have already found a way to circumvent one of UEFA’s new rules which states that any sponsorship deal has to pass a “fair value” test.
“They are signing a naming rights deal with Etihad Airways, the airline owned by the Abu Dhabi government, which is worth £40 million. No one has ever signed a naming rights deal for anything like this sum and the Manchester City sugar daddies are indirectly related to Etihad Airways, but nothing will be done to stop the deal.”
Neither will UEFA introduce the hard salary cap, which would control excessive spending on players, he argues.
[quote]“The big clubs don’t want a hard cap and UEFA is too weak to enforce one. They fear that the big clubs would threaten to break away and form a new European league. If they did this – and they have the power to do so – the various national football associations would not have the courage to kick them out. The Premier League without Manchester United and Chelsea would be unthinkable. Sponsorship and TV deals would collapse. So the big clubs possess all the bargaining power and UEFA knows it is helpless.”[/quote]Related: The Barcelona School of Management
Related: Corruption & Money: The Language of FIFA
Frinck argues that only one thing can bring the clubs to their senses and moderate their excesses: A string of bankruptcies.
“Insolvencies are necessary in football. We have the threat of insolvency for a good reason in business. It stops people throwing away money for years and years,” he said.
[quote]“The problem in football is that the threat is hardly ever executed, unlike in other industries. Football clubs want to operate under different rules to other capitalist enterprises, but they must accept the rules of the market.”[/quote]“What I’m really hoping for is one or two spectacular bankruptcies at major clubs. It won’t happen at the very biggest ones, but the tier below that could have an effect on changing thinking in football,” he added.
In Britain, two bankruptcies are imminent. In Scotland, the historic Rangers club, in Glasgow, has gone into administration. Rangers owes £24 million (US$38 million) in unpaid tax and £12 million (US$19 million) in interest and penalties. Meanwhile, Portsmouth has also gone into administration for the second time in three seasons.
These clubs however may not be quite big enough to have the effect Frinck craves. Rangers, despite their long history, play in the marginal Scottish league and Portsmouth play in the Championship, which is a division below the Premiership. But Frinck says we could well see a bigger European club fall before long.
David Smith,
EconomyWatch.com