By Elliott Turner
]http://sports.yahoo.com/soccer/blog/dirty-tackle/post/El-Clasico-Enjoy-it-while-you-can?urn=sow-289768[ftp=ftp://]]][/ftp]]http://sports.yahoo.com/soccer/blog/dirty-tackle/post/El-Clasico-Enjoy-it-while-you-can?urn=sow-289768[ftp][/ftp]To help us prepare ourselves as we hyperventilate and count the seconds until Monday's match between Barcelona and Real Madrid, we have a special guest post from Futfanatico's Elliott Turner.
I prefer to view the world of European soccer as the Earth orbiting on a titled axis, with the center of gravity subtly shifting every few years. A decade ago, Italian sides such as AC Milan and Juventus dominated European competition. As recently as five years ago, Chelsea and Manchester United ruled the roost. Today, Barcelona is the king of the continent, with Madrid, their rival en el Clasico, a few paces back. But how did they ascend to the throne? And how long will their reign last?
The executive summary is simple: debt and not long. For the Catalans, the numbers are grim. By most estimates, Barcelona's current debts exceed €400 million. In July, just after signing star striker David Villa from Valencia, the Club had to negotiate a short-term loan just to make payroll. The new club President has announced laughable austerity measures. And also filed a lawsuit against former President Joan Laporta, accusing him of cooking the books and pocketing some cash for himself. Boardroom brawls and election speeches are one thing, but litigation for embezzlement hints at major problems.
Of course, their neighbor and rival to the West is hardly the shining example of prudent financial planning. Real Madrid re-elected Florentino Perez two years ago after a brief hiatus, and he promptly spent over €200 million on a handful of players. His strategy, "the Galacticos", is akin to the late George Steinbrenner's Yankees: sign talented players that are also marketable. Emphasis on marketable. Still, Madrid's debts only exceed €300 million.
So, at a glance, the top two teams in Europe rely on a second mortgage to live among the elite. Of course, both are valued over $1 billion by Forbes. But can one rely on those valuations? Liverpool FC was valued at over $800 million, but sold for $480 million. This begs the question -- how do balance sheets and estimates transfer to a world of few buyers? For now, the banks and lenders live in ignorant bliss. But that may change. In May, the global stock market shook as Spain's credit was downgraded. Short-term loans may be hard to come by even for these giants of the game.
But how did the Spanish clubs reach this point? Should we toss the blame on the phantom "vultures of globalization," who swoop into unsuspecting markets to cannibalize innocent domestic businesses? Sadly, the Spanish government deserves blame (or credit) for leaving the backdoor wide open.
The first factor in Spain's ascent (or descent) was "La Ley Beckham." Spain, hoping to attract prominent engineers, scientists, and executives, revised their tax code several years back to allow foreigners to claim non-domicile status. Of course, this loophole allowed Spanish clubs to offer super competitive salaries to the global footballing elite. Don't think it matters? Well, Russian star Andrei Arshavin's move to England resulted in an estate planner hissy fit. So, yes, the footballing millionaire club counts the percentages when looking at income taxation. And Spain offered a sweet deal.
Offering a good tax rate is one trick, but failing to collect taxes can also grease the wheels of the enterprise elite. At the height of the aforementioned Laporta cooked-books-bonanza, it appears the Spanish IRS was asleep at the wheel. Spanish clubs racked up hundreds of millions of euros in unpaid taxes, with not so much as a slap on the wrist. Recently, the Spanish government passed a resolution requesting payment. This ranks just above an angry phone call, but just below a sternly worded letter.
So, in sum, this match pits the two best players in the world against one another, Messi vs. Ronaldo. And all because the Spanish government slipped up on drafting its tax code, looked the other way, and Barcelona crafted clever balance sheets while Real Madrid's CEO schmoozed with his bank CEO friends. Still, despite the impotence of Spain's government, recent reforms at UEFA suggest an impending end to this gravy train.
UEFA, who runs the highly prestigious and lucrative Champions League, has recently enacted a "financial fair play" requirement for clubs to participate. Basically, debts cannot be preposterous when compared to actual income. Guess what? Both Real Madrid and Barcelona's debts are preposterous when compared to their actual income. Thus, in the short future, both must change their ways or risk being expelled from Europe's elite.
Granted, this stop sign may be knocked down by the next UEFA President -- the Champions League needs Real Madrid and Barcelona just as much as they need it. Still, the internal economic pressure from within may be enough to burst either club at anytime. So find a comfy couch, sip a cold beer, and enjoy this spectacular, credit fueled Clasico while you can.
Elliott blogs about soccer at Futfanatico.com
