Football and economics

For the benefit of the reader who complained to me that they don’t get my posts about football, here’s something to tie the game up to economincs.

It’s a tale of two football clubs. The first is Portsmouth. Pompey went into administration last week. That was the end of a process which started a few years back when they started to borrow lots of money in order to try to compete with the big Premiership sides. The borrowed money was spent on buying and paying players – quite a few of them are still there, and still need to be paid. The main sources of income for the club were ticket sales, TV fees, prize money and merchandising. Success on the pitch would being more income from all sources. But in the end, they over-extended themselves. One FA Cup and a few season in the middle of the top division did not increase income by much. But the debt was still there.

Now, let’s compare Portsmouth with the nations of Iceland and Greece. In both cases, ambitious gambles on foreign assets were placed, based on debt. In both cases, those gambles failed. In both cases, the assets themselves became a drain on the revenue budget, and so the debt spiralled up. When the repayments came due, they ended up having to take radical steps not to be completely wound up.

Now consider Man Utd. Man Utd has £700M of debt. That’s about 10x the level that Portsmouth can’t deal with. But Manchester Utd can deal with it. Why? Well, before the debt was taken out, the club was profitable. Indeed, if you remove the payment on the debt, the club is operationally profitable. It has the advantage of a larger stadium, a greater pre-existing fan-base, and a very good means of producing decent players through the youth system. It was already successful, and while it was banking on continuing that form, it has to be said that there was less of a risk that Man Utd would fail to consistently finish in the top 3 of the Premiership and do well in national and European competition than that Portsmouth would fail to establish themselves as a major player. So the debt is higher, but it is manageable

So which country or countries would be analagous to Man Utd? Well, maybe the US or UK are a stretch, but they certainly have large debts, but at the same time both have major resources and are able to keep repaying on the debts even in dark times.

Not that Man Utd (or the US and UK) do not have challenges to meet, because they do. Clearly increasing that debt is not a sustainable policy. Clearly external factors can change their positions. Clearly bringing in incompetent managers that can’t maintain performance would be a risk. And of course there will be good seasons and bad ones.

But just because Man Utd has more debt than Portsmouth (or the UK has similar national debt to Greece) does not make their situations the same.

2 Responses to “Football and economics”

  1. Skuds Says:

    I heard rumours today that Bournemouth FC are heading for financial trouble too.

    Getting worried about the trend here – are all the clubs Harry Redknapp managed going to go under?

  2. Danivon Says:

    Well, he was largely to blame for Portsmouth’s problems, paying over the odds for players. The transfers between Pompey and Spurs over the last few years are a bit eyebrow raising.

    I was originally going to compare Greece to Bournemouth (long term minor player, several problems in the past, caught out by a bad spell), but I thought two clubs was enough to make the point.

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