The Truth About Debt At Barcelona And Real Madrid

Despite their failure to reach next month’s Champions League final, Barcelona and Real Madrid are by common consent the best two club sides in world football. Featuring superstars such as Lionel Messi and Cristiano Ronaldo, their talented players entertain and delight us in equal measure, as they dominate La Liga season after season.

However, admiration of their exploits is tempered by the financial advantages that they enjoy compared to other less fortunate clubs. Not only do they generate far more revenue than anybody else (around €100 million higher than the nearest challenger, Manchester United), but one of the main reasons for this substantial competitive advantage is an unbalanced domestic TV deal that awards the two Spanish giants almost half of the money available.

Their reputation off the pitch also suffered a hit recently in the media when it was “revealed” that these great teams were built on a mountain of debt (€590 million at Real Madrid and €578 million at Barcelona), raising questions as to whether this was, to coin a phrase, “financial fair play.”

Quite why this came as a surprise to some analysts is a little perplexing, given that the clubs’ accounts have been available to the public for many months. Whatever.

"Pep Guardiola - Goodbye cruel world"

The fundamental issue is whether this debt is too high, as many commentators suggest, with the implication that these grand old clubs might even be in some financial difficulty.

That might seem like an easy question to answer, but, as is so often the case in the murky world of accounting, it’s not quite so simple. To give a comprehensive response, we have to do three things:

1. Importantly, understand what this debt figure actually represents, as there are numerous definitions, all of which can be equally valid in different circumstances.

2. Look at the overall strength (or weakness) of each club’s balance sheet, i.e. also at assets, not just liabilities.

3. Explore how well the debts are covered by items such as income and cash flow.

To avoid looking at Madrid and Barcelona in isolation, we should also compare their debt position with that at other leading clubs. For the purpose of this exercise, I have opted to look at two English teams, Manchester United and Arsenal, as they are useful comparatives, who are viewed as being at different ends of the spectrum. The former are known for the large amount of debt they have been carrying since the Glazers bought the club via a leveraged buy-out, while the latter are often portrayed as the poster boy of sustainable football clubs.

"Jose Mourinho - I couldn't bear to be special"

1. What is debt?

For people without a financial background, the different definitions of debt can be a bit confusing, as acknowledged by UEFA’s snappily titled Club Licensing Benchmark report, which stated, “In practice, the term ‘football club debts’ has been used in many different ways with a great deal of flexibility, references ranging from the very broad, totalling all liabilities that a club has, to the narrow definition of debt financing either including or excluding interest-free owner loans.”

At the narrowest extreme, we have just bank debt: at the broadest extreme, we can use total liabilities, which covers all financial obligations, including tax liabilities, trade creditors, provisions for future losses, accrued expenses and even deferred income. Often, when the media refer to debt, they actually mean total liabilities.

This includes what might be described as operational debt, such as: (a) trade creditors (payables) for amounts outstanding on bills for products or services received, e.g. rent, electricity; (b) money owed to staff, e.g. wages earned by staff paid at the end of the month, bonus payments; (c) other accrued expenses (accruals), which are the same as payables except no invoice has yet been received; (d) provisions, which are an estimate of probable future losses, e.g. legal claims; (e) and, most bizarrely, deferred income for payments received for services not yet provided, e.g. season ticket revenue for matches to be played in the future.

That last one highlights one danger of using liabilities as a definition for debt, as season ticket money received in advance is clearly not a bad thing, as UEFA explain: “It is recorded as a liability, as accountants consider the cash received as not yet being fully earned until the matches take place. This is a liability, but not a debt that will have to be paid back.”

So, much of Madrid’s €590 million and Barcelona’s €578 million debt includes liability for what might be termed normal operations. If we apply the same definition to Manchester United, they have debt (total liabilities) of just under €1 billion (£824 million converted at a rate of 1.20). Even Arsenal’s debt on the same basis is €524 million, which the journalists would no doubt describe as “eye-watering” if they were talking about others and not their template for a well-run club. To use an old adage, you have to make sure that you are comparing apples with apples.

Of course, if you wanted to make a club’s debt look as bad as possible, then you would absolutely use the total liabilities definition. However, it is very conservative to say the least. Indeed, in response to their critics, Madrid and Barcelona might feel like misquoting Mark Twain: “The reports of my debt have been greatly exaggerated.”

The net debt reported in an English club’s financial statement will be in line with IFRS (International Financial Reporting Standards) and essentially covers purely financial obligations, such as overdrafts, bank loans, bonds, shareholder loans and finance leases less cash. On this basis, the gross debt of Madrid and Barcelona at €146 million and €150 million respectively is not only considerably smaller than the figure highlighted in the press, but is also much lower than Arsenal €310 million and Manchester United €551 million.

The difference is not quite so large for net debt, as both United and Arsenal have substantial cash balances, but the Spanish clubs are still lower: Madrid €48 million and Barcelona €89 million. Arsenal are much of a muchness with €117 million, while United are the outlier with a hefty €370 million.

In their Financial Fair Play (FFP) guidelines, UEFA introduce a third definition of debt which lies somewhere between the narrow calculation employed in annual accounts and the widest possible measure of total liabilities: “A club’s net player transfers balance (i.e. net of accounts receivable from players’ transfers and accounts payable from players’ transfers) and net borrowings (i.e. bank overdrafts and loans, owner and/or related party loans and finance leases less cash and cash equivalents).”

They go on to explicitly state, “Net debt does not include trade or other payables.” However, it does include the net balance owed on player transfers, which is a reasonable approach to take, as this can be an important element in the business model adopted by some football clubs, e.g. this amounts to €76 million at Madrid (actually down from €111 million the previous year and an astonishing €211 million in 2009), though it is only €12 million at Arsenal, which probably comes as no surprise to those fans that have been exhorting the club to spend some money.

This has clearly been an important factor in allowing Madrid to finance big money acquisitions. Although all clubs make stage payments for transfers, very few do so to the same extent as Madrid (and indeed Barcelona).

Of course, this does not make the practice inherently wrong. Indeed, UEFA commented, “It is worth noting that the size of transfer payables reported in financial statements can be influenced by the timing of the financial year-ends relative to the timing of transfers, and that transfer payables are, in most cases, not overdue but in line with the payment schedule agreed between the respective clubs.”

Under this UEFA definition, it is remarkable how similar the net debt is between Madrid, Barcelona and Arsenal, with all three clubs reporting a balance in a narrow range of €124-131 million. The exception to the rule is United with, deep breath, €442 million.

2. Strength of the balance sheet

To state the blindingly obvious, liabilities are only one side of the story (or balance sheet). To get a full picture of a football club’s health, we also have to look at its assets. This is where the English clubs start to look better, as they tend to have higher assets, especially as they usually own their own stadiums.

United’s net assets (assets less liabilities) are a mighty €973 million, though €618 million of this is due to inter-company receivables from the parent undertaking, while Arsenal have a highly respectable €322 million. Madrid are far from shabby with net assets of €251 million, but Barcelona fall down on this measure with net liabilities (also described as negative equity) of €69 million. In other words, their reported liabilities are larger than their reported assets. Barcelona are far from alone in this, as UEFA’s benchmarking report noted that 36% of clubs reported negative equity in 2010, but it is still nothing to be proud of.

If this ratio is refined to only cover current assets and liabilities (payable within 12 months), then it is even worse for the Spanish clubs, as they both have net current liabilities: Madrid €141 million and Barcelona €226 million.

Once again, the accounting values are a little misleading when looking at the balance sheet, because of the way that certain assets are treated in the accounts. As UEFA say, “Some of the principal assets of a club, such as a loyal supporter base, reputation/brand, membership/access rights to lucrative competitions, and home-grown players, are not included within balance sheet assets since they are extremely difficult to value, despite them unquestionably having a value. These unvalued assets tend to be greater for larger clubs.”

"The Glazers - Money (that's what I want)"

This is highlighted when a football club is sold. Invariably, the purchaser pays a higher price than the fair value in the accounts and the difference is booked as an asset called goodwill. In this way, Manchester United’s balance sheet includes £421 million of goodwill.

This can also be seen very clearly with player valuations. In the accounting world, when a player is bought, football clubs do not expense the cost immediately, but instead book it onto the balance sheet as an intangible asset and write it off evenly over the length of the contract. Following the Bosman ruling, the assumption is that the player will have no value after his contract expires, since he could then leave on a “free”.

However, the value in the real world is almost always higher. As Javier Faus, Barcelona’s Vice President of Finance once explained, his club has over €250 million of assets that are not reflected in the balance sheet. This is particularly the case for the Catalans, as their team is full of players developed in-house by the legendary La Masia, and these effectively have zero value in the accounts. I don’t know exactly how much the likes of Messi, Xavi and Iniesta would be worth if sold, but I do know that it’s more than zero.

The respected Transfermarkt website does actually list values for each major team’s squad, so we can get an idea of how much stronger each club’s balance sheet would look if you applied real values instead of accounting values. As expected, this is most striking in the case of Barcelona, where the real value is estimated as €591 million, so €470 million higher than the books, leading to adjusted net assets of €401 million.

Of course, it would kind of defeat the object if a club were to realise that value by selling all its players, but a few judicious sales can make a big difference to the reported strength of a club’s balance sheet.

3. Debt coverage

As we said earlier, Real Madrid (€480 million) and Barcelona (€451 million) have the highest revenues in world football, covering around 80% of their debt, which is significantly higher than their English counterparts, Arsenal 57% and Manchester United 40%. In Arsenal’s case, this is obviously a function of much lower revenue (€307 million), even though I have included property income, as liabilities are not split by business segment.

However, as the old saying goes, “revenue is for vanity, profit is for sanity”, so a more useful ratio might be cash flow to debt, which provides an indication of a club’s ability to cover total debt with its annual cash flow from operations. There are many ways of defining cash flow, but I have used EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) for simplicity’s sake. Others might adjust for (irregular) profit on player sales, while you could also use free cash flow, (operating cash flow minus capital expenditure).

Contrary to popular belief, Real Madrid and Barcelona are relatively profitable: Madrid have made total profits of around €200 million in the last five years, including €47 million last season; while Barcelona’s loss was only €12 million. Adjusting for non-cash flow expenses like depreciation and amortisation plus interest produces very impressive EBITDA of €151 million for Madrid and pretty good €66 million for Barcelona. In the same way, Manchester United’s notable ability to generate cash results in excellent EBITDA of €138 million.

So, Madrid’s cash flow over debt ratio comes in at 26%, much better than the others: Manchester United 14%, Arsenal 13% and Barcelona 11%. Simply put, the higher the percentage, the better the club’s ability to pay its debt.

While it is clearly important to be able to ultimately pay off debt, a club’s ability to service its interest expenses is absolutely crucial. This can be explored with the interest coverage ratio (cash flow/interest payable), which tells a similar story to debt coverage, i.e. Madrid’s ratio of 11.7 is by far the best, though the others are not too bad: Barcelona 4.5, Arsenal 3.9 and Manchester United 2.5 (anything below 1.5 is a bit questionable).

What is striking here is just how much higher the interest payable is at United €56 million (£46 million) compared to the other clubs: Arsenal €18 million, Barcelona €15 million and Madrid €13 million. In fact, both “heavily indebted” Spanish clubs actually pay less interest than the two English clubs.

Let’s look at the debt in a bit more detail for the clubs we are reviewing, as this might throw up some other anomalies.

Real Madrid’s accounts use yet another definition for debt, which is essentially the same as UEFA’s definition (bank debt plus net transfer fees payable) plus selected creditors (essentially stadium debt). This gives a net debt of €170 million, a reduction of €75 million from the €245 million in 2010. That’s pretty impressive, especially when we consider that the net debt peaked at €327 million the year before.

That said, for many years before 2009 they had no bank debt at all. The loans are split evenly between Caja Madrid and Banco Santander and were mainly used to finance the major signings that summer. The interest rate is relatively low, but the loans do have to be repaid by 2015, though even here Madrid were given some leeway with lower payments in the first three years.

Stop me, if you’ve heard this before, but Barcelona also use a different definition for debt, providing their Annual General Meeting with a figure of €364 million, which is not fully explained, but the main distinguishing factor is that some debtors are deducted to arrive at the net balance.

This represents a 15% reduction from the €430 million reported the previous season, but is still higher than the preceding years. Indeed, Javier Faus, Barcelona’s Vice President of Finance, admitted, “We’ve reduced the debt, but we’re still in a delicate situation. The debt is still too high for us to be able to dictate our future. We can’t afford to owe so much money to the bank, and we need to generate more income.”

He emphasised the board’s concern when he added, “It’s not the debt that we want, and we have to reduce it further, to sustainable levels, with regard to the cash flow generated by the club. We’ll continue to work on it.” Ideally for Faus, the net debt would be “just over €200 million.”

Indeed, Barcelona were forced to take out syndicated loans of €155 million in 2010 from a group of banks led by La Caixa and Banco Santander, though club president Sandro Rosell has defended Barca’s debt level, arguing that it is eminently serviceable via its huge revenues, “The club is not bankrupt, because it generates income. The banks know that we have a business plan that will allow them to recover the money.”

Indeed, the willingness of Spanish banks to help Barcelona is a factor, as it is difficult to imagine a scenario where a local financial institution would be responsible for damaging the emblem of Catalonia, given that its customer base is largely made up of the club’s supporters – even with the struggles in the Spanish economy. This is evidenced by the banks ignoring Barcelona’s breach of commitments in terms of total liabilities made when securing the 2010 loan.

Manchester United have also succeeded in reducing their net debt, which was cut from £377 million to £308 million (£459 million gross debt less £151 million cash), after the club bought back £64 million of its bonds. This is down from a peak of £474 million in 2008.

Last year the club raised around £500 million of funds via a bond issue, so that they could repay the previous bank loans, in order to fix the club’s annual interest payments for a longer period (up to 2017), thus ensuring more financial stability. However, there was a price to be paid, which can be seen with a comparison to Arsenal’s bonds, as the debt has to be repaid quicker (7 years vs. 21 years) and the interest rate is higher (8.5% vs. 5.75%).

The really annoying thing for United fans is that this is still unproductive debt. While clubs like Chelsea and Manchester City have used their debt to fund the purchase of better players and Arsenal used theirs to build a new stadium, United’s debt was only used to enable the Glazers to buy the company.

At least the owners managed to find £249 million last November to pay off the prohibitively expensive Payment In Kind notes (PIKs), which carried a stratospheric interest rate of 14.25% (rising to 16.25%), though it is unclear how they funded this repayment. Including the PIKs, United’s gross debt was at one point as high as £773 million with annual interest payments of around £70 million. To paraphrase Winston Churchill, “never has so much been owed by so many to so few.”

"Emirates Stadium - good debt"

Included within the net debt as at 30 June 2011 are astounding cash balances of £151 million, though this was boosted by cashing the £80 million Ronaldo cheque and the £36 million upfront payment from the shirt sponsor. United’s board has argued that it likes to retain so much cash to provide “flexibility”, but this seems a strange decision when they have to pay 8.5% interest on the bonds, while cash balances are unlikely to attract more than 2% interest.

The latest financial engineering from the Glazers is the decision to float a minority stake of the club via an IPO (Initial Public Offering) on the Singapore Stock Exchange with whispers suggesting that the board is seeking to raise £600 million for a 30% stake. The IPO was postponed last year due to volatile market conditions, but is now reportedly back on the agenda.

If some of the proceeds were used to repay part of United’s debt, as the club has apparently briefed journalists, then they would benefit from lower interest payments, though this would not improve cash flow if they were then replaced by dividends to the new shareholders.

Arsenal have now eliminated the debt they built up as part of the property development in Highbury Square, reducing gross debt to £258 million as at end-May 2011. That comprises the long-term bonds that represent the “mortgage” on the Emirates Stadium (£231 million) and the debentures held by supporters (£27 million). Once cash balances of £160 million are deducted, net debt was down to only £98 million, which is a significant reduction from the £136 million last year and the £318 million peak in 2008.

Many fans ask whether it would be possible for Arsenal to pay off the outstanding debt early in order to reduce the interest charges, but chief executive Ivan Gazidis has implied that this is unlikely, arguing that not all debt is bad, “The debt that we’re left with is what I would call ‘healthy debt’ – it’s long term, low rates and very affordable for the club.” In any case, the 2010 accounts clearly stated, “Further significant falls in debt are unlikely in the foreseeable future. The stadium finance bonds have a fixed repayment profile over the next 21 years and we currently expect to make repayments of debt in accordance with that profile.”

So, Real Madrid and Barcelona might not exactly be sitting pretty in terms of debt, but their situation is not quite as bad has been made out. However, it is true to say that debt is a major issue for many other Spanish clubs.

A recent study by Professor José Maria Gay de Liébana of the University of Barcelona revealed that total debt of La Liga clubs was €3.5 billion with half of them having negative equity (though it should be noted that the accounts from seven clubs were only from the 2009/10 season and two from as far back as 2008/09).

As Professor Gay said, “Everyone is concentrated on Madrid and Barca, who are the kings of the banquet, while the rest live a real uncertain future. Many clubs are living dangerously.”

While Madrid and Barcelona unsurprisingly top the list with debt (total liabilities) of €590 million and €578 million, seven other clubs have debt over €100 million, most notably Atletico Madrid €514 million, Valencia €382 million (even after selling stars like David Villa, David Silva and Juan Mata) and Villarreal €267 million. In contrast to the big two’s debt cover (by revenue) of around 80%, theirs is much lower, e.g. Atletico Madrid just 19%.

Spanish football’s struggles are highlighted by the fact that no fewer than six clubs in the top division are currently in bankruptcy protection: Racing Santander, Real Mallorca, Real Zaragoza and all three promoted clubs (Real Betis, Rayo Vallecano and Granada). Furthermore, the beginning of this season was delayed by a players’ strike over unpaid wages. The figures are frightening with 200 players owed a total of €50 million, up from €12 million owed to 100 players the previous year.

"Athletic Bilbao: good football, low debt - what's not to like?"

This is due to two factors: (a) Spanish football’s inability to govern itself properly; (b) the awful state of the economy.

Up until recently, the Spanish Football League (LFP was unable to impose any meaningful sanctions on financial miscreants, but a new law came into force in January 2012 that now authorises the authorities to relegate a club in administration – though whether they have the stomach for a confrontation with a club’s supporters is debatable.

In fairness to the LFP, they have also been impacted by the troubled economy, as Spain is entering recession with a record unemployment rate of 24% (a horrific 40% for young people) and Standard & Poor’s cutting the country’s credit rating. As LFP president José Luis Astiazaran noted, “We are not immune to the wider economy.” Professor Gay agreed, “Football is largely a reflection of what has been happening in our economy, with people spending way beyond their income, relying on fanciful growth forecasts and ending up with unsustainable debt and an asset pricing bubble.”

It could be argued that the dominant position of the two Spanish powerhouses is slowly killing Spanish football. This financial pre-eminence is boosted by the “every man for himself” approach taken with the individually negotiated TV deals. Madrid and Barcelona both trouser €140 million a season with the nearest club to them, Valencia, receiving about a third at €48 million. Thirteen of La Liga’s clubs receive between €13-18 million, including Athletic Bilbao with just €17 million. What price them holding on to all of the scintillating young talents that have enthralled us during their Europa League campaign?

Spain is unique among the leading European leagues in not having a collective TV deal, which explains why accusations of selfishness have been aimed at Madrid and Barcelona. The Sevilla president, José Maria del Nido, complained, “We cannot allow a situation where, because two clubs are very powerful, they bring about the demise of the Spanish league.”

That said, football is an amazingly resilient industry and it has not yet collapsed under the weight of debt in Spain, even though the issue is not a new one. In fact, La Liga debt has been about the same level of €3.5 billion for the last four years. Although it rose €50 million last season, the 2001 debt of €3.53 billion is actually lower than the €3.561 billion peak in 2008.

Nevertheless, there is no room for complacency, when a comparison is made with the other major European leagues. At €3.5 billion, Spanish liabilities are by far the highest, almost a billion Euros more than Serie A €2.7 billion (up €327 million in 2010/11) and the Premier League €2.6 billion (2009/10 figure). The debt levels in the financially disciplined leagues are unexpectedly much smaller: the Bundesliga €0.9 billion and Ligue 1 €0.7 billion.

In addition, the Spanish league also has the worst debt coverage (in terms of revenue) at 47% compared to the others: Serie A 63%, Premier League 95%, Ligue 1 140% and the Bundesliga 193%.

This sad state of affairs was underlined when it emerged that Spanish clubs owed the taxman €752 million, including €426 million from clubs in the top division. In fact, that came from just 14 of the 20 clubs, as the remaining six had no outstanding tax debt. According to the AS newspaper, that included Real Madrid, which seems a little strange, as both the club’s accounts and the study by Professor Gay do list tax liabilities.

Once again, Atletico Madrid have the dubious honour of leading the pack with the largest tax debt of €155 million, even after paying the €50 million from the sale of Sergio Aguero to Manchester City directly to the tax authorities. The next highest was Barcelona with €48 million.

This high level of tax debt is galling to many, particularly given the fragile Spanish economy, not to mention the fact that Spain has five clubs in the semi-finals of the Champions League and the Europa League – including the aforementioned Atletico Madrid.

As always, Uli Hoeness, the forthright president of Bayern Munich, got straight to the point, “This is unthinkable. We pay them hundreds of millions to get them out the shit and then the clubs don’t pay their debts.” In fairness, some clubs have negotiated payment plans with the authorities, such as Atletico Madrid (€15 million a year), Levante (5 years) and Mallorca (10 years).

On top of that, the Spanish government and the football league recently announced new rules that would pave the way for the clubs to repay the outstanding tax debts, as the threat of intervention from European Union anti-trust officials loomed large. The LFP said, “Economic control will be strict, as well as the sanctions regime.” These measures will include clubs being obliged to set aside 35% of TV rights revenue for tax payments from the 2014/15 season; clubs possibly being forced to sell players to raise cash; and clubs maybe even booted out of the league.

"Holidays in the sun"

Of course, Spain is hardly unique in having clubs facing severe tax issues, as fans of Rangers and Portsmouth would no doubt attest, but it is the magnitude of the debt in Spain that is concerning, especially given the relatively low revenue of some of the clubs involved.

Given the understandable focus on tax liabilities recently, it might also be a good idea for UEFA to include these in their definition of debt in order that clubs take this issue more seriously than they appear to have done in the past. It is actually a little strange that UEFA do not, as Article 50 of the FFP regulations specifically states that there should be no overdue payables to social/tax authorities (as well as employees) in the same way that Article 49 prohibits overdue payables towards football clubs. While the latter is included in their definition of net debt, the former is not.

In conclusion, while there are some very real debt problems in Spanish football, the situation is not quite so dramatic at Barcelona and Real Madrid as some would have people believe. It would obviously be better for their balance sheets if the debt was lower, but their ability to generate revenue is unsurpassed, admittedly partly due to the current unfair TV deal, but also their high gate receipts and awesome commercial strength. These operations continue to grow, as seen by Barcelona’s record-breaking shirt sponsorship deal with the Qatar Foundation and Real Madrid’s plans to build a $1 billion holiday resort in the United Arab Emirates.

"Put your shirt on it"

Of course, the two Spanish giants may still come under pressure from their creditors at some stage, especially if they embark on a summer spending spree following the disappointing Champions League semi-final exits. Nor should the impact of Spain’s faltering economy be trivialised, but the fact is that right here, right now, the important debt (bank loans, transfers and tax liabilities) is relatively low, at least for clubs of this size.

When reading reports on how much Barcelona and Real Madrid owe, it’s not quite a case of “don’t believe what you read”, but you do need to understand what any analysis is actually referring to, because, as we have seen, debt has many different definitions.

Caveat emptor – or something like that.

Real Madrid And Financial Fair Play

So in his first season as Real Madrid manager José Mourinho justified his much vaunted reputation as a winning manager, but the problem is that his team only added the Copa del Rey to the trophy cabinet. This was just a consolation prize for the most successful club in Spanish history, especially as their eternal rivals Barcelona won the two competitions that really mattered, namely La Liga (for the third season in a row) and the Champions League, when they out-passed (and out-classed) Manchester United.

Of course, it is Mourinho’s misfortune to come up against a Barcelona side that is universally recognised as one of the greatest to ever play the beautiful game. Indeed, there is an argument that Madrid are the second best team in the world, but the nagging sense of disappointment among the Bernabéu faithful is almost palpable, as the club’s aspirations are to be number one.

Madrid have been champions of the Spanish league no fewer than 31 times, while they have been victorious in the European Cup (or Champions League) on nine occasions – more than any other club. However, they have not won Europe’s flagship competition since 2002, which is an eternity for a club of Madrid’s stature, aggravated by the fact that Barcelona have been triumphant three times in that period. Only this month Madrid’s flamboyant president Florentino Pérez said that he would not rest until the club had won a tenth European Cup.

"José Mourinho - still special"

Madrid have not held back from attempting to spend their way to success, splashing out around a billion Euros in the last decade in a fruitless attempt to emulate former glories. Pérez’s original Galácticos project failed to deliver sustained success on the pitch, despite shelling out vast sums for superstars like Zinedine Zidane, Ronaldo and David Beckham, leading to the president’s resignation in 2006.

However, he was back just three years later and wasted little time in making his presence felt, as huge amounts were once again invested in new talent, including Cristiano Ronaldo, Kaká, Xabi Alonso, Karim Benzema and Raúl Albiol with Pérez somewhat superfluously commenting, “Real Madrid’s philosophy is to have the best players in the world.”

Nevertheless, that 2009/10 season ended in another ignominious exit from the Champions League, when Lyon eliminated Los Merengues at the last 16 stage. This meant that Madrid had not won a Champions League knock-out tie for six years, leading the local media to conclude that their “stratospheric spending” was nothing more than a colossal waste of money. Even the conservative daily ABC was moved to describe it as “more than 250 million Euros down the drain.”

"Florentino Pérez - the minute you walked in the joint..."

This has lead to a fine-tuning of the big spending policy during Mourinho’s reign. Yes, Madrid have still bought more than their fair share of players, including Mesut Özil, Sami Khedira, Nuri Şahin and Hamit Altintop from the Bundesliga, but by their own prodigious standards the sums involved were relatively restrained with only the tricky Argentine winger Ángel di Maria costing more than €20 million.

Although this subtle change in direction might imply that Pérez’s strategy of recruiting world-class players has not worked, it has to be acknowledged that their presence in the Madrid team has helped facilitate a transformation in the club’s financial performance. Many people not unreasonably assume that Madrid’s spendthrift ways must inevitably lead to financial disaster, but that is not necessarily the case. Indeed, there has already been talk this summer of the club reverting to type, as they are reportedly wiling to splurge €45 million on the mercurial Brazilian Neymar or a similar amount on the exciting Argentine striker Sergio Agüero.

UEFA’s President, Michel Platini, has condemned Madrid’s “excessive transfers as representing a serious challenge to the idea of fair play and the concept of financial balance”, leading to the obvious assumption that Real Madrid would not be able to meet UEFA’s forthcoming Financial Fair Play (FFP) regulations that encourage football clubs to live within their means.

"Mesut Özil - the eyes have it"

Eminent academics appear to be in some disagreement whether Madrid’s business model is viable. Barcelona University’s José Maria Gay did not hesitate to put the boot in, “Real’s most important revenue streams won’t be enough to offset their spending. The costs have soared and they need to increase income by about 20 per cent to balance the accounts. It’s a very risky investment.”

However, while Simon Chadwick, professor of Sport Business Strategy and Marketing at Coventry University, largely concurred with this pessimistic view, he also pointed out that Madrid had “made a very simple and obvious investment decision that many businesses across the world make on a daily basis”, namely to spend generously in the hope of achieving “a level of success that generates revenue in excess of the costs incurred.”

And that’s the crux of the matter, as Madrid are in fact doing exactly that. In spite of their massive spending, the club is not only profitable, but is making large profits year after year: 2007 €44 million, 2008 €51 million, 2009 €25 million and 2010 €31 million. That works out to over €150 million of profit in just four seasons.

Not only did profit before tax increase by 24% from €25 million to €31 million in 2009/10, but EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) also rose 20% from €93 million to €112 million, which is 25% of revenue of €442 million. In other words, for every €100 of income earned, there is a surplus of €25 after covering expenses. This is important, because this is the main source of funds available to make investment in players and facilities after meeting the club’s financial commitments.

In fact, it’s actually even better if you include the profit on player sales of €34 million, mainly derived from the sale of the Dutch contingent (Arjen Robben, Wesley Sneijder and Klaas-Jan Huntelaar) in August 2009, which increased EBITDA to a very healthy €146 million.

"There must be an Angel (playing with my heart)"

Of course, that excludes the impact of cash spent on purchasing new players, which is only reflected in the profit and loss account via player amortisation. As you might expect, this has been on the rise and the combined player amortisation and depreciation figure now stands at €102 million, reducing operating profit (excluding player sales) from €17 million to €10 million.

It should be noted that Madrid have been accused of some fancy footwork in their accounts as well as on the pitch, which can be seen by the large number of exceptional items between 2005 and 2008, mostly relating to the purchase of players. During the first Pérez regime, the club decided to write-off the cost of new players in the period of acquisition instead of capitalising the cost as an asset and then amortising it over the length of the player’s contract.

However, this policy was not in line with international (or even Spanish) accounting standards, so was reversed in 2008, resulting in a large credit for the accelerated amortisation previously booked to the accounts. Only a cynic would suggest that the previous treatment lowered the exceptional profits made from selling the club’s training ground, thus reducing the tax payable to the authorities. Hopefully, that sort of creative accounting is a thing of the past and the last two sets of accounts look a lot cleaner, though this opinion is only based on a high-level inspection.

In any case, Real Madrid’s 2009/10 pre-tax profit of €31 million is very good compared to other leading European clubs, only surpassed by Arsenal’s €67 million, which was boosted by property sales. Perhaps surprisingly, it’s a fair way ahead of Bayern Munich, often held up as a paragon of virtue in the football world, whose profit was “only” €6 million.

However, it really shines when you look at the magnitude of losses made by some of Europe’s other big boys. Those made at Inter €68 million, Chelsea €84 million and new kids on the block Manchester City €146 million were covered by wealthy owners, while Barcelona €83 million were hit by a series of audit adjustments and Manchester United €146 million suffered from the mountain of debt placed on the club by the Glazers.

Essentially, Madrid’s profits are due to their astonishing ability to generate revenue. They are the only club to generate more than €400 million and have topped the Deloitte Money League for six years in a row. Although Deloitte’s revenue figure of €439 million is slightly lower than the €442 million reported in the club’s accounts, it is still over €40 million ahead of Barcelona’s €398 million and €89 higher than Manchester United’s €350 million.

To place Madrid’s revenue superiority into context, their annual turnover is more than €100 million higher than Bayern Munich, €150 million higher than Arsenal and an incredible €200 million more than Milan, Inter and Liverpool. From another perspective, Madrid earn the highest match day income and have the second highest television and commercial revenues streams.

All in all, it’s fair to say that the relatively modest performance on the pitch has not exactly hindered Madrid’s money-making machine. In fact, it’s the exact opposite, as they have grown revenue at a faster rate than all their peers with the exception of Barcelona. In 2003, Madrid were in fourth place in the Money League behind Manchester United, Juventus and Milan with revenue of €193 million, but they have managed to increase this by a very tidy €249 million (or 129%) to leave them comfortably ahead of the pack today. Only Barcelona’s revenue growth of €275 million (or 224%) has been higher than Madrid’s, but they started from a lower base €123 million, and the other clubs have all lost ground in relative terms.

Going back a little further, Madrid’s accounts reveal that revenue has grown at an average annual rate of 14% since the €118 million reported at the turn of the millennium in 2000. Much of that growth came in the early years, but Madrid still managed to increase revenue by an impressive 9% last season. Even more striking is the club’s claim that their income of €442 million is the highest in the sports industry anywhere in the world.

The other notable aspect to Madrid’s revenue is how balanced it is between the three revenue streams with about a third being sourced from match day, television and commercial. This diversified structure gives the club economic stability, providing some protection against future fluctuations in income.

A few years ago Madrid were unduly reliant on their marketing expertise, but, while this remains a very important element in their strategy, the other aspects of their revenue have grown much more, so that the split is now as follows: television €159 million, match day €149 million and commercial €135 million. Amazingly, each of those revenue streams on their own provide more income than the total revenue at every club except the top 16 in the money league.

Even though Madrid have been remarkably successful in producing a balanced revenue model, broadcasting revenue still provides them (and Barcelona) with a key competitive advantage over their foreign counterparts, thanks to their lucrative domestic deal. For example, Manchester United generated €31 million less than Madrid, even though they received €19 million more in Champions League distributions.

Unlike all the other major European leagues which employ a form of collective selling, Spanish clubs uniquely market their broadcast rights on an individual basis, so Madrid’s seven-year contract with Mediapro is worth a guaranteed €1.1 billion. According to the respected website Futebol Finance, this was worth €140 million in 2009/10, the same as Barcelona, and more than three times as much as the nearest competitors, Valencia and Atletico Madrid, with €42 million, followed by Villarreal €25 million and Sevilla €24 million.

In other words, Madrid and Barcelona on their own received around half of the total TV money in La Liga or 12 times as much as the €12 million given to the last clubs on the list (Malaga, Sporting Gijon, Tenerife and Xerez). This produces the most uneven playing field in Europe and compares unfavourably to the 1.5 multiple in the Premier League between first and last clubs.

Looked at another way, both Madrid and Barcelona received about twice as much from their domestic deal as Premier League champions Manchester United, even after a significant increase in the latest English deal. However, in stark contrast, West Ham, the team that finished bottom of the Premier League, received more money than Valencia, who finished third in the Spanish league. The logical result of such a disparity is a distinct lack of competition and a need by clubs such as Valencia to sell their best players, e.g. David Villa and David Silva last summer, which further reduces the chances of other clubs providing a stern test to the big two.

Such a revenue disadvantage is bad enough for one season, but it makes a gargantuan difference over time. As Sevilla president José Maria del Nido complained, “The two giants have earned €1,500 million more than the next club in the last ten years.”

One potential problem for Madrid’s TV revenue is the much publicised difficulties experienced by rights holder Mediapro, which are so severe that the company has sought bankruptcy protection over a dispute with Sogecable. However, they do have a bank guarantee supporting the contract, unlike Barcelona who have strangely only been given a “verbal guarantee of payment.”

"Xabi Alonso - far from shabby"

However, the strongest threat to this revenue stream is the proposal to move the current revenue distribution model towards a collective structure. Tentative agreement has been reached whereby Madrid and Barcelona’s share would be reduced to 35% (still more than a third), which would imply a reduction in TV revenue of around €34 million to €106 million. While this will clearly hurt their financials, it could have been a lot worse, especially as their nearest challengers Valencia and Atletico Madrid also had their share cut to 11%. As most clubs have contracts in place until 2013 or 2014, the new system will only be introduced in 2015.

There is a feeling that this might not be the end of the story, as two clubs have still not signed the deal: Villarreal and Sevilla. Although Madrid and Barcelona are by some distance the most popular clubs in Spain, it is equally true that there would be no league without the other clubs. In an echo of the threats that were used to persuade the leading clubs in Italy to accept a return to a collective deal in 2010/11, Espanyol director Joan Collett said, “Maybe we should play our youth team against Madrid and Barcelona.”

If that comes to pass, Madrid will have to make up the revenue shortfall somewhere, but they might just be able to do it from television – by taking a smaller slice of a larger pie. For that plan to work, the new revenue agreement would obviously have to be worth more in total, which does not seem completely unrealistic, given that the television revenue in La Liga is currently lower than the Premier League, Serie A and Ligue 1. The Premier League is the “daddy” when it comes to generating television revenue, so this is the one that the Spanish are examining for growth opportunities.

"Sergio Ramos - Madrid's heart and soul"

The current English deal is worth around €1.3 billion a year, which is more than twice as much as the €0.6 billion received by La Liga, the main reason for the difference being the hefty €575 million that the Premier League receives for foreign rights. According to an estimate by Sporting Intelligence, La Liga only gets €160 million for overseas rights, so the Premier League’s deal is worth almost four times as much.

That is a huge prize to go after, which is the reason why so many in Spanish football are now actively pushing to make the “product” more attractive to viewers abroad, as articulated by former Real Madrid legend Emilio Butragueño, “We want … a brand like the Premier League. The best players in the world are here in Spain and we have to profit from it.” Madrid’s own president, Florentino Pérez has also argued for an earlier kick-off for some games, so that they are more convenient for Asian TV audiences, “The change is vital if the Spanish league is to compete with the English.”

Another opportunity to increase broadcasting income is the Champions League. Although Mourinho’s men reached the semi-finals last season, where they were defeated by Barcelona (again), the last time they got beyond the last 16 before that was back in 2004, which has cost them millions in prize money – as well as gate receipts and sponsorship uplifts.

This is highlighted by the figures released for 2009/10, which show that Madrid only received €27 million compared to the €49 million awarded to the winners Inter. It was even worse before that, as the disappointing performances in the previous six seasons resulted in an average of just €19 million. OK, such amounts would be gratefully received by most clubs, but it’s no great shakes for Madrid.

There are two more interesting financial points arising from the Champions League for Madrid: on the one hand, it’s virtually a guaranteed source of revenue, given the lack of competition in La Liga; but, on the other hand, the money allocated from the market pool is much lower than for English clubs, as the TV deals in Spain have a lower value than England.

More impressively, Madrid’s match day revenue has more than doubled in the last five years from €71 million in 2005 to €149 million in 2010, though that was boosted by the hosting of the Champions League final at the Santiago Bernabéu.

The club’s accounts state that they have spent €184 million in the last decade on modernising facilities in the stadium, which has included the reconfiguration of certain areas to grow corporate hospitality revenue, such as three new restaurants and larger VIP boxes. As an example of how much money this can bring in, Bloomberg reported that Madrid sold 4,500 premium tickets, some costing as much as €1,652, for the Champions League semi-final against Barcelona.

The club has also raised membership fees and ticket prices, which may have contributed to crowds falling below 70,000 in recent years. Nevertheless, according to the Soccerway statistical website, Real Madrid’s average attendance in 2010/11 of 68,295 was still the fifth best in Europe, only behind Barcelona (yes, them again), Borussia Dortmund, Manchester United and Bayern Munich.

However, Madrid’s commercial philosophy is perhaps most interesting. The club’s stated strategy is to strengthen its brand through investment in top players, which it then monitises via merchandising, licensing and sponsorship. It’s a little bit like a Hollywood movie studio, which means that they need the best “actors” for their “show” that can then be leveraged into higher sales.

There are clearly risks associated with such a strategy, but in fairness it seems to have worked to date, judging by the revenue (and profit) figures. Madrid’s popularity has remained undiminished, which has helped drive the astounding commercial revenue of €151 million (after re-classifying membership fees), second only to Bayern Munich’s almost unbelievable €173 million in the money league. The only other club with commercial income approaching that was Barcelona with €122 million, which will rise to much the same level as Madrid’s once their first shirt sponsorship deal is included.

Madrid benefit from long-term sponsorship agreements with key partners. Their partnership with Adidas commenced in 1998, but that did not stop Pérez from negotiating a substantial increase after signing Ronaldo and Kaka, and it is now believed that Adidas pay €30-40 million a year for the privilege of being associated with the Les Merengues.

Similarly, the club’s shirt sponsor, online betting company Bwin, extended its agreement by three years until 2013 for €15-20 million a season. That’s pretty good, but recent sponsorship deals have raised the bar, such as Barcelona €30 million (Qatar Foundation) and Liverpool €24 million (Standard Chartered), so Madrid will undoubtedly be looking for an increase when the deal is up for negotiation. The club also has other high profile partners including Coca Cola, Audi and Spanish beer company Mahou (producers of San Miguel).

According to a report from Sport + Markt, Madrid earn more from merchandising than any other club, increasingly from sales abroad, boosted by frequent tours to other regions like the Far East. Along with Manchester United, they sell more shirts worldwide than any other club (1.2 to 1.5 million a season).

In the past, Madrid have maintained that they covered the transfer fees for players like Zidane and Beckham through shirt sales, though others like the former Barcelona economics director, Xavier Sala I Martin, have poured scorn on these claims, pointing out that you would have to sell tens of millions of shirts to recoup the money, given the low profit margin on each shirt.

"Welcome to the Pleasuredome"

That said, a player’s star quality can also help in other areas, e.g. Madrid take half of a player’s image rights, which can generate considerable money for the club. Furthermore, big name players could also help boost television income in the future. As Nigel Currie of Brand Rapport explained, “They are looking to make money from these signings by maximising their future overseas TV rights. The team that has the most marketable players will get the best TV deals.” There has even been some talk of building a theme park at the club’s training facilities.

However, it will be fascinating to see whether a team formed in Mourinho’s dour image is as appealing to sponsors as the previous star-studded elevens. Even the loyalist Madrid newspaper Marca described one of the displays as “defensive, ugly and rough”, while Barcelona president Sandro Rosell claimed that “this season Real Madrid have gone beyond all the limits of the necessary sports rivalry.” This may seem unconnected to Madrid’s financial prospects, but for a club so focused on its brand, this is a pertinent question.

So, there’s no doubt that Real Madrid have the highest revenue of a football club at €442 million, but they also have just about the highest costs at €432 million (including depreciation and amortisation), which is only surpassed by Barcelona €470 million.

Their wage bill of €192 million is actually only the fourth highest, behind Barcelona €235 million, Inter €234 million and Chelsea €207 million, but interestingly they have the best (lowest) wages to turnover ratio of 43%, which is a long way below UEFA’s recommended maximum limit of 70% and is actually within their “threshold of excellence” of 50%. Not only does this put into the shade other big spending clubs like Manchester City 107%, Inter 104%, Chelsea 82% and Barcelona 59%, but is also better than more frugal clubs like Manchester United 46%, Bayern Munich 47% and Arsenal 50%.

Moreover, Madrid’s wage bill is inflated by the inclusion of salaries for their basketball team. We don’t have the split for this figure in the latest accounts, but in 2008/09 this amounted to €23 million. If we assume that this was a similar figure in 2009/10, the football wage bill would reduce to €169 million.

That said, Madrid clearly pays top dollar to attract big stars, as reflected in the latest Futebol Finance list of the world’s top 50 footballer salaries, which includes nine players from Real Madrid – more than any other club (Barcelona 7, Manchester City 7, Chelsea 6). At the top of the pile is Cristiano Ronaldo €12 million, followed by Kaká €9 million, Emmanuel Adebayor (on loan from Manchester City) €8.5 million and then Iker Casillas, Karim Benzema and Gonzalo Higuain, all on €6 million.

Although the wages are clearly high at Madrid, the overall situation has been steadily improving in the past years. Back in 2002, the wage bill was €137 million, compared to a turnover of €152 million, leading to a very high wages to turnover ratio of 90%. Since then, wages have grown 40%, but that has been considerably outpaced by revenue growth of 190%, leading to the important wages to turnover ratio being halved.

However, Madrid’s budget for 2010/11 highlights an 8% increase in the wage bill to €208 million, which would reverse this trend, though still producing a very healthy wages to turnover ratio of 46%.

Similarly, the budget assumes that amortisation further rises from €102 million to €109 million, after rising by more than a third in 2009/10 from €76 million. Although Madrid now book transfer fees as intangible assets, the expenditure is reflected in the profit and loss account through player amortisation. As an example, Nuri Şahin was bought for a fee of €10 million on a six-year contract, adding €1.7 million of amortisation a year to the expenses.

In other words, although the full cost of a transfer does not hit a club’s costs immediately, it will catch up sooner or later, which is exactly what is happening to Madrid. The 2008/09 accounts revealed that the amortisation figure included €12 million of general depreciation. Assuming this was unchanged for 2009/10 gives player amortisation of €90 million, which is higher than any other club. The closest challengers for this unwanted title are Manchester City €85 million, Barcelona €71 million and Inter €65 million.

In the last ten years Madrid have spent €957 million on purchasing new players, though they have managed to partially offset this by €309 million of sales, giving a net spend of €648 million. Interestingly, their spending has been on a rising trend with net spend of €432 million in the last five years being exactly twice as much as the €216 million laid out in the previous five years.

By my reckoning, they have bought ten players in that period for a fee above €30 million. Although reported transfer fees are notoriously unreliable, the list includes: Cristiano Ronaldo €96 million, Zinedine Zidane €75 million, Kaká €67 million, Luis Figo €60 million, “Brazilian” Ronaldo €45 million, Arjen Robben €36 million, David Beckham €35 million, Karim Benzema €35 million, Xavi Alonso €30 million and Pepe €30 million.

However, Madrid have also spent smaller sums (relatively speaking) on recruiting players who have starred for other Spanish clubs, but are destined to only have bit part roles at Madrid, such as Sergio Canales, Pedro Léon and Esteban Granero. It’s difficult to say whether this is a gamble on young potential or an attempt to prevent other clubs from keeping their talents.

Over the last five years, Madrid’s net transfer spend of €432 million is only beaten by Manchester City with €460 million, but is over €200 million more than Barcelona €225 million and Chelsea €176 million. At the other extreme, we have thrifty clubs like French champions Lille and Arsenal generating net sales. Amusingly, Milan are also in the black, largely due to selling Kaká to Madrid.

There is talk this summer that Madrid will try to offload some players in order to recoup some funds, including Kaká, Lassana Diarra, Fernando Gago and Ezequiel Garay. However, when Madrid sell, it is traditionally a buyer’s market, as other clubs are keenly aware that they are looking to offload players who are no longer wanted.

One logical result of Madrid’s high transfer spending is high debt levels, which is true, but not to the extent that has been reported by the media. This is going to be a bit tricky to follow, but the basic point is that there are several definitions of debt.

At its simplest, Madrid have gross bank debt of €167 million, which is not too bad in light of their vast revenue, though for many years before 2009 they had no bank debt at all. The loans are split evenly between Caja Madrid and Banco Santander and were mainly used to finance the signings that summer. The interest rate is relatively low, but the loans do have to be repaid by 2015, though even here Madrid were given some leeway with lower payments in the first three years.

Furthermore, Madrid have cash balances of €93 million, so the net bank debt, the figure reported by English clubs, is only €74 million. Madrid say that this cash (along with the 2010/11 cash flow) will “allow us to comfortably handle payment obligations next year.”

However, what is very striking about Madrid’s balance sheet is the enormous amount owed to other clubs for transfer fees of €176 million (net €111 million after including €65 million owed to Madrid by other clubs). This appears to be Madrid’s principal method of financing transfers, a policy followed by many other clubs, but not to the same degree. In fairness, this has fallen by €100 million this year.

Adding the transfer fees payable to the bank debt gives net debt of €185 million, which is the definition used by UEFA in their FFP regulations. However, Madrid’s own definition of net debt also includes stadium debt, resulting in a balance of €245 million, an impressive 25% reduction from the prior year’s €327 million, though not quite as low as the €210 million forecast by Pérez at the AGM.

"Kaká - on his way?"

Other commentators have opted to use total liabilities of €660 million for the “debt”, but that includes trade creditors, provisions, accruals and deferred tax, all of which are explicitly excluded by FFP. If this measure were applied to other clubs to assess their debt, the headline figures would be equally shocking, e.g. Manchester United €1.2 billion, Barcelona €552 million. Even Arsenal, which is regarded as the poster child for sustainability, would have “debt” of over €500 million. To use an old adage, you have to compare apples with apples.

Of course, Madrid have got into serious financial difficulties in the past, which they only resolved by selling their training ground in 2001, a controversial move that effectively amounted to a state subsidy, as the city authorities reclassified the area as development land, thus significantly increasing its value.

However, as it stands, Madrid would comfortably meet UEFA’s guideline that net debt should be less than total revenue. Madrid themselves review the tougher solvency ratio of net debt/EBITDA, which improved from 3.1 to 1.7 last season. FFP also focuses on payables not being overdue, which might impact Madrid, though this is unlikely, as it is defined as “not paid according to the agreed terms.”

"Nuri Sahin - a sign of things to come?"

If Madrid required more cash, this would not be a problem. Although the club’s constitution does not allow Pérez to fund the club, his position as one of the wealthiest men in Europe with wide-ranging business interests clearly helps Madrid’s relationship with banks and sponsors, as he has a huge network of influential friends and contacts, maybe best demonstrated by the fact that a Catalan bank provided the €57 million guarantee that he needed to stand for the presidency.

Also, if financial matters deteriorated, would any bank ever dare to call in their debts? In many ways, Real Madrid are viewed as the establishment club in Spain with immense cultural and political significance, so are almost certainly “too big to fail.” Stefan Szymanski, co-author of “Soccernomics”, agreed, “Real’s really too big to disappear, whatever debt they incur. No bank would ever be allowed to be the one that sank Real Madrid.”

In fact, Madrid’s balance sheet shows net assets of €220 million, up €24 million from the previous year, even though the players are only included at net book value of €353 million, which is much lower than their true worth in the transfer market, which is estimated at €515 million by Transfermarkt.

To summarise, Madrid will be in line with UEFA’s break-even target for the simple reason that they make profits, but even if their financial situation were to worsen, there would be plenty of room to manoeuvre. For example, owners will be allowed to absorb aggregate losses (“acceptable deviations”) of €45 million, initially over two years and then over a three-year monitoring period, as long as they are willing to cover the deficit by making equity contributions. The maximum permitted loss then falls to €30 million from 2015/16 and will be further reduced from 2018/19 (to an unspecified amount).

Furthermore, clubs can exclude certain expenses, including depreciation on tangible fixed assets and expenditure on youth development and community activities, which would be worth at least €20 million for Madrid. On top of that, Madrid might argue that the loss made by the basketball team (€23 million in 2008/09) should also be ignored, though the FFP guidelines suggest that “other sports teams” should be included.

Perhaps the biggest threat to Madrid’s financial strength is the desperate situation of Spanish football in general. The 20 clubs in La Liga made a combined loss of €100 million in 2009/10, while many have large debts and are behind on wage payments. All this is exacerbated by the prevailing economic conditions in Spain with unemployment running at around 20% (and youth unemployment at 30-40%).

"Casillas thanks the crowd - the feeling's mutual, Iker"

The Sevilla vice-president warned, “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 said, Spanish clubs appear to have become more attractive to foreign investors recently, as overseas money has bought into Malaga, Getafe and (less successfully) Racing Santander in the last 12 months.

While Real Madrid’s policy of buying the best players has clearly not guaranteed success on the pitch, it has been very good from a financial perspective. UEFA themselves pointed out, “The financial fair play rules do not prevent clubs from spending money on transfers, but require them to balance their books at the end of the season.”

The fact is that Real Madrid will pass the FFP test as easily as Cristiano Ronaldo goes past a tiring full-back. In fact, their remarkable ability to generate revenue will stand them in very good stead in the fair play era, providing them with a strong competitive advantage. As long as they can resist the urge to constantly change their manager and players, that financial strength could help them return to winning ways. If that happens, then it might be another case of the rich getting richer, as that is likely to translate into even more commercial success.