UEFA Financial Fair Play Regulations: A Lesson for the European Debt Crisis
Fans of European club football, governed by the United European Football Association (UEFA), know that football clubs have been struggling with debt and excess leverage. Just like other corporations, football clubs took advantage of cheap credit to fund their operations, either to build new stadiums or buy new players. Since the global financial crisis erupted and a lot of these clubs, including world famous clubs such as Liverpool FC, Manchester United FC, and Real Madrid CF, have started to see revenue growth slow, their debts have become more of a problem both for them and for the banks who own the loans. Last summer, Bankia put up the AAA-rated loan it gave to Real Madrid to buy both Cristiano Ronaldo and Ricardo Kaka as ECB collateral to get quick cash.
UEFA reacted swiftly in recent years, rolling out a set of regulations that are set to even the playing field and shore up the finances of over-leveraged clubs. One thing that UEFA is doing which should be applauded is that, rather than force harsh restrictions in the near term, UEFA has set up these new Financial Fair Play (FFP) Regulations to be rolled in over time, so as to allow the clubs to absorb the deleveraging slowly. Compare this to the programs prescribed by the Troika for the crisis nations in the European Debt Crisis, where they are making nations in financial trouble cut back tremendously in a short time span to adhere to strict deficit and debt restrictions. This short-term focus is driving the countries into economic, financial, and political chaos, making a bad situation worse.
So what can European leaders learn from FFP Regulations? First, a short term focus and strict restrictions that slash budgets in the near term are only causing more pain; a more medium- to long-term perspective on curing the crisis would allow countries to adapt over time. Also, have a concrete set of penalties that are agreed upon and adhered to for not meeting targets. For example, FFP Regulations state that clubs not meeting the rules (starting in the 2013-2014 season) will be banned from European competitions, which can cost them upwards of $46 million in television revenue rights. Other restrictive measures being proposed are banning transfer activities so that clubs cannot buy or sell new players (an effective hiring freeze), imposing further taxes on clubs who break the rules, and even forced administration (bankruptcy) for chronic rule-breakers.
Measures like those above, not just saying that we will be upset with you if you break the rules, could help to force countries like Greece and Spain adhere to deficit targets, by making the pain spread out over time and making the punishments much more concrete and clear. Rather than send nations into debt-depression spirals like Greece and Spain, the Troika might consider changing its stance in the wake of the effectiveness of FFP Regulations.
For those who don't know, most football clubs derive the majority of their revenue from shirt sponsors and television rights deals. As reported by Benzinga today, Manchester United just signed a new shirt sponsorship deal with General Motors (NYSE: GM). Television rights make up a huge amount of revenue for these clubs also, with the twenty premier league clubs bringing in an astonishing $1.466 billion in television broadcasting revenue in the 2010-2011 season.
Governments and football clubs are similar in that they have only a few revenue streams, for governments it is taxes and for football clubs it is the two listed above, but lots of varying expenses, a large one being the cost of debt. The measures taken by UEFA are working: football clubs' assets-to-equity ratios are falling, meaning firms are becoming less leveraged. European leaders tasked with solving the European Debt Crisis, I implore you, learn from this good example and take the lessons to heart.
© 2014 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.