As Bankia fails, Real Madrid is teetering on the edge of the abyss
By Tony Attwood
The finances of Real Madrid are fairly sound. If the full-blown FFP were up and running now, Real Madrid would be ok. They are nothing like Emirates Marketing Project, Chelsea, PSG etc.
Real Madrid owe money, but not too much compared with their turnover. So in normal times they won’t fail. But these are not normal times.
Because Real Madrid’s bank is in the most serious trouble. As is the country. (As I drove to my office this morning I heard the comment on the radio that Spain’s economy is too big to be allowed to fail, but is also too big to rescue. That seems to sum it up).
As a result of this situation the normal roles are reversed. According to Süddeutsche Zeitung, one of the most widely read newspapers in Germany, and one that speaks with a certain authority, the most expensive footballer in history [C Ronaldo] may now be used to guarantee the solvency of a Spanish bank.
Or put another way: “Ronaldo in the bailout fund,” as SZ’s headline said.
The problem is that the Bankia group of savings banks, which finance Real Madrid’s endless acquisition policy, is now needing to borrow funds from the European Central Bank. And the ECB (rather taken up with Greece at the moment) want guarantees. So (and I am serious here, this is not a Billy the Dog make believe story) Bankia are said to be offering Real Madrid players as part of the guarantee. Not surprisingly, the ECB is not that impressed.
SZ then asked if the ECB could seize the players if Bankia totally insolvent. In theory they could, and as a result Real Madrid would default on the rest of its loans, secured in themselves by money from advertising, TV and the gate receipts. Given that the constitution of Real Madrid forbids the president of the club and others from personally financing the club, that would be the end.
Now the reason that this sort of thing has not happened before is that in Spain the clubs have often obtained bailouts from public funds – rather like the banks in the UK. As the Sevilla vice-president recently said, “There are six or seven of the 20 clubs in La Liga who are in bankruptcy or administration through difficulties with social security and the tax authorities.” That’s six or seven Rangers and Portsmouths, all playing in the top league in Spain.
Florentino Pérez, top dog at Real Madrid, has maintained the club’s finances and currently the club has a debt of about £150m. From David Beckham onwards the trick has been the same, merchandising, ownership of their own TV rights, and always coming in the top two in a two team league.
The system works because of the Spanish tax system which means that football leagues in other countries have to pay up to 70% more in wages to match the take home pay of players in Spain.
So there’s a system – Real Madrid borrow money, get players pleased to get extra income and less tax, and sell shirts, their own TV rights and the rest. And behind it as always is a bank – Bankia – which has failed to the tune of €19bn in the sort of crazed situation that (as the Financial Times said this week), “always brings down banks.”
Looking at Greece we might also say that it also brings down countries. Who knows which way Greece will go, but one way or another their tax system has to be reformed. Which is what has got to happen in Spain. Which is another reason why Real Madrid, and the whole of Spanish football, is under threat. They have benefited from being able to take players who will go anywhere and have the players pay very little tax. And that is about to end.
Bankia is going through the same sort of disaster scenario as the one that hit the savings and loans industry in the US (something that cost $100bn to sort out, according to the FT).
It is the old issue of banks throwing money at property developers. That is what has been happening in Spain, and as always it results in a crisis. Since so much of Spain’s economy has been based on this approach the crisis is large.
So if you want to get a grip on Spain’s problem and Bankia’s problem – and therefore Real Madrid’s problems – just think about Morgan Stanley and Goldman Sachs in the USA – and then add in the question of the interest rates and the unemployment rate.
In the last few days the cost of borrowing money in Spain has gone up and up, until now (at approaching 7% on the 10 year bonds last time I looked) the banks are in a position where they can’t raise any more money. (If you want to put it in perspective try this – if you had £10,000 in your bank account in the UK earning an interest rate so tiny you can hardly see it, you might be tempted by 7% in Spain. And then you might wonder if you will get your money back – so you don’t do it. That’s it in a nutshell.)
Spain’s economy is shrinking (1.8% this year) and unemployment is at an eye-watering 25%. So Spain has to reform. But it has to do this with banks that are now bust – just as the Royal Bank of Scotland in the UK was when it took over Liverpool FC.
Which takes us back to Real Madrid. It is solvent, but its bank isn’t and nor is the country in which it exists. Real Madrid is solvent because it uses the very low income tax rates to attract players. If that goes, or if it can’t find a bank to finance it, or if the whole economy goes Greek, Real Madrid has to restructure at an enormous speed, and the days of the purchasing of the world’s most expensive players will be over.
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