A red card for Spain’s debt-ridden soccer clubs

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Photo: AFP/Getty Images.

Spain’s soccer teams are living off the loans largesse of regional, provincial and municipal governments. Many fear it is a debt bomb that could explode soon. Spain may be the reigning World Cup national champion team, but the clubs that play in its domestic football league are in a distressed financial situation.

The European Commission believes Spain’s soccer debt bomb has to be defused. It is sounding out the government in Madrid on why so many clubs from La Liga, as the Spanish league is known, have received public funding. It also wants an explanation of the preferential tax and social security treatment the clubs have received. Spain’s government said last year that clubs owe $975 million to the tax authorities.

“This is unfair since all other Spanish taxpayers, as well as the other European football clubs, must, of course, be up to date with their tax payments,” Willy Meyer, a Spanish MEP for the United Left coalition, wrote in a recent parliamentary question to the Commission’s competition commissioner Joaquín Almunia.

Spain’s unemployment rate is one of the highest in Europe. Foreclosures occur daily, as many people can’t pay their mortgage debt. The same rules don’t seem to apply to soccer teams.

Whenever a club suffered financial difficulties — due to mismanagement, overpaying a star player or any other reason — its representatives turn to the public authorities, who then grant state aid through loans. That easy ride is over, the E.C. says. The subsidies must stop, and teams must live within their own means. Just because the industry’s workers are superstars in shorts, it doesn’t mean the the E.U’s rules on illegal state subsidies don’t apply.

A formal E.C. investigation could be launched soon. That will probably bring to light even more murky relationships not just between between politicians, banks and football but with the wider business world, too.

In March, the E.U’s antitrust authorities opened an investigation in to the funding of three Valencia football teams – Valencia, Hércules and Elche. The teams listed their regional government, controlled by Prime Minister Mariano Rajoy’s Popular Party, as a guarantor against €118 million ($154 million) in bank loans (read more: Spanish local government finance: White elephants in black shorts).

More recently, the Commission said it was investigating Real Madrid for allegedly receiving a favorable deal from the city council for land around the team’s Bernabeu stadium on which it plans to build a shopping mall and hotel complex. In 2012 Real became the first sports club to generate more than €500 million in revenue in a single year, according to Deloitte.

The Spanish football league, while being one of best known in Europe and boasting some of the game’s best teams and biggest stars, is also the most financially unstable. Some say the league would have folded if the state had acted against the bankrupt clubs with the same measures they use on other deadbeat companies. Many wonder why Brussels hasn’t stepped in before, even as it demanded harsh deficit-reducing measures from the country in return for partially bailing out its banks last June.

“We pay hundreds of millions of euros to get Spain out of the shit and then they let the clubs off their debts,” Uli Hoeness, president of the German team Bayern Munich, said when the $975 million number was made public, most likely echoing the feelings of many of his compatriots­. Bayern, widely regarded as a model of financial stability, has been profitable for the past 20 seasons.

On April 8, the Commission’s president Jose Manuel Barroso and Michel Platini, his counterpart at UEFA, European soccer’s governing body, met to discuss how to bring European teams’ finance to safe ground. The gathering also confirmed an informal alliance between E.U. policies restricting state aid and UEFA’s efforts to implement its financial fair play initiative, intended to level the financial playing field by ensuring Europe’s top clubs live within their means and not rely on sugar-daddy financing from deep-pocketed owners.

Meanwhile, the E.C.’s antitrust watchdog has also opened an investigation in to whether the financial support given to five Dutch soccer clubs complied with E.U. rules on state aid.

Joaquín Almunia, a Spaniard and Athletic de Bilbao supporter, has said: “I strongly believe that professional football clubs should be well managed and not ask for help from the tax-payer when facing financial difficulties.”

It is yet to be seen how Madrid responds to the Commission’s inquiries and if Almunia will be reaching for a red card, or just the yellow, and, whichever it is, how Spain’s club’s can restore themselves to financial stability so the bread and circuses of Ronaldo, Messi and friends can continue.