The Storm begins...

“It’s only when the tide goes out that you see who’s swimming naked” Warren Buffett

Sometimes they call it Hobson’s Choice. More accurately it is termed Morton’s Fork, a situation in which no choice can lead to a good outcome, yet a decision must be made. Such was the case with the recent decision by the Scottish Premier League to reject the application of Newco Rangers’ application for membership. There was a choice between fatally crippling the economic model of the SPL or breaching the integrity of the game by making an exception on pragmatic grounds. Either choice meant the end of the SPL as we know it, and no matter what decision they came to, there was going to be a huge degree of buyer’s remorse.

Glasgow Rangers are now by some margin the most high-profile club ever to fold. The Old Firm, the colloquial name for their rivalry with Glasgow Celtic, was one of the world’s great sporting feuds. Granted, it was rather uglier than most footballing rivalries (eight deaths were attributed to Old Firm clashes between 1996 and 2003), and its sectarian tint was a stain on Scottish football for decades, but at the same time it was one of the most exciting matches on the calendar. Now those days are in the past. Celtic have, for the moment, achieved total victory over their rivals.

The question is, what now, for Rangers, Celtic, and the SPL as a whole? This isn’t like Portsmouth going south a few years ago. Portsmouth were a very small fish in the biggest pond of them all. Rangers were a very big fish in a very small pond. Their collapse is more analogous to the collapse of Lehman Brothers in 2008, an event of such scale that it threatens to take down the whole system.

The obvious thing is preventing such events recurring. The problem is that this was what Nassim Nicholas Taleb calls a Black Swan event, one that was outside the normal parameters of foreseeability. The tax troubles that brought down Rangers could perhaps be prevented, but only by a more intrusive auditing mechanism by the league as a whole. Other clubs, whose own debt positions might not be as benign as an initial glance could suggest, would undoubtedly not be too fond of anything that might shed light on their problems. And even this is a specific solution to a more general problem, namely the vulnerability of already indebted clubs to financial shocks. Tax issues are not the only way a club could suddenly find its debt position worsening suddenly. The reality is that the tax problems were a symptom of greater issues with Rangers’ finances, rather than the underlying cause of their woes.

If tax issues were a high-impact, low-probability event for Rangers, then the demise of Rangers was doubly so for the SPL. A huge portion of the SPL’s revenue model was derived from Rangers and Celtic. The SPL has never been a model of fiscal probity, with five clubs having entered administration in the decade and a half that the league has been in existence. While the huge disparity between the Old Firm and the rest of the league was frustrating from a sporting point of view, the revenues accruing from the Glasgow giants were vital to the other clubs. Playing Rangers was a guarantee of good gate receipts.

More important were the TV deals. Following an internal renegotiation of the distribution of TV revenues in 2003, the SPL had a degree of redistribution of TV cash from the bigger clubs to the smaller ones. With TV deals being signed collectively by the league, the aggregate quality of clubs in the league is as important as the quality of any given club. The deal for the forthcoming five seasons is worth about £80m to the league. However, Sky and ESPN signed that deal on the basis of being able to screen four Old Firm games a season. With that out the window, a substantial downwards renegotiation of the TV deal is on the cards.

Anytime a club with a rich history drops out of sight is a loss for football. Leeds United’s fall from grace a decade ago certainly did the English Premiership no favours, what with there being no Yorkshire club left there, but Leeds were only one of a number of big clubs, and so their loss could be absorbed. There could still be high-profile matches in the Premiership without Leeds. Rangers were one of two top teams in the SPL. The qualitative difference between Celtic and the remaining teams is so great as to make the league a pointless affair for the foreseeable future.

If the SPL as a whole has lost out spectacularly from this, then Celtic’s loss has been greatest of all. All great sporting rivalries are inherently symbiotic affairs, and the Old Firm was the bitterest of them all. No other European pairing could match Celtic and Rangers for combined success and geographical proximity, the two primary factors from which rivalries are born. The sectarian side of things may have been unpleasant, but the bitterness made for some great matches. Much as they may detest their Glaswegian counterparts, Celtic are going to rue their absence. By some estimates the Old Firm was worth £120m for the two clubs and the surrounding area. In losing their greatest rivals, Celtic have also lost their greatest source of revenue.

In the short term, Celtic are going to romp through the league. Rangers were the only ones who came close to giving them a run for their money. It’s been a quarter of a century since another club won the league, and six years since another finished second. For the next few years we can assume that clubs are going to line up to have Celtic destroy them. However, in the medium term, Celtic’s greatly diminished revenue will impact on their purchasing power, and the quality of their players is likely to disimprove. As a result, while the gap will never fully close, it is likely that Celtic will be gradually reduced to something more approximate to the quality of the rest of the league.

Meanwhile, the effects will be felt most strongly at the lower end of the scale. In voting against allowing Newco Rangers to join, a number of SPL clubs may have cut their own throats. Never a paragon of prudent financial management, the SPL is facing the prospect of up to half its teams going into administration within the next year. The short term fillip of potential Champions League football for whoever now finishes second is only going to last until UEFA reallocate the spot to a more deserving league in football terms. Each club also had the guaranteed money spinner of hosting Rangers at least twice a season, as well as a share in the TV money pot. With these gone, the financial pinch will be all the more acute.

The major question is what should happen next. In the least bad scenario, the SPL clubs come to their (fiscal) senses and bring Newco Rangers into the fold. In the absence of full agreement, a breakaway league would be a possibility, as would folding the four tiers of Scottish football into two so as to shorten the time it would take Rangers to get back to the top, though this would have the consequence of reducing Old Firm games to two a season. Assuming that there is no consensus on these, things get messy.

The first imperative is to get Celtic out of the SPL. Without the Old Firm, it would only be a matter of time before Celtic find themselves staring down the barrel of financial ruin. Meanwhile, the situation for other clubs does not improve. Once UEFA take the second Champions League spot from Scotland, any club has to mount a challenge to Celtic. Winning a Rangers-free SPL will be every bit as hard as coming second in the old one. Meanwhile, the overwhelming dominance of Celtic would rapidly make the SPL a rather disinteresting affair. However, if Celtic left the league, there would at least be some competition. Each club would now have a shot at Champions League football, albeit at an earlier start point than before. In addition, the financial burden on the other clubs would be reduced, as each would have to build a squad to beat each other, rather than the vastly richer Celtic. In the short term, there would be a financial hit, but it would be less than expected. Most of the damage to the TV deal was done when Rangers left, and the loss of the second Glasgow club would not be much more problematic. Meanwhile, attendances might actually pick up if teams thought they had a shot at winning the league, rather than coming second.

For Celtic, too, the exit is the only way to avoid catastrophe. Even if the English Premiership didn’t take them, the Championship would still be worth it, particularly if the club was capable of being promoted. The alternative is a steady decline in Scotland. Celtic are too big for the SPL, and their continued presence there will only harm both parties in the long run.

There are wider lessons to be learned from this mess. The deepening weakness of balance sheets in the SPL and beyond have left clubs supremely vulnerable to system shocks. As clubs have amassed ever greater amounts of debt, and player wages continue to spiral out of control, a point has now been reached where carnage is inevitable. Even in the good times, SPL clubs were still going into administration, and with the loss of Rangers and the revenue therein, the situation is doomed to worsen. A league with this level of volatility will never function properly.

What is to be done? The SPL may now face a massive correction that sees it reduced in stature to something similar to the other secondary leagues in the British Isles. For other leagues, there is still a chance to mitigate the problem. Forcing clubs to hold cash equivalent to a certain proportion of their revenues would go a long way towards strengthening their balance sheets. Wage and transfer controls would enable clubs to plan effectively for the future. And keeping public accounts would alert authorities to clubs in danger at an early stage.

The reality is that no business is risk-free. However, in a football league all parties have a certain degree of interdependence, and therefore a responsibility to each other. Other clubs will be dragged under by Rangers’ demise. And the SPL is not alone. Rangers may well be the first of a string of clubs to pass from administration into liquidation. Already Portsmouth look to be inching towards the brink. In Germany, FC Schalke still labour under the weight of the debt they incurred building the Veltins-Arena a decade ago, while in Holland, Feyonoord’s ongoing failure to make an impression in Europe has pushed it into the danger zone.

However, the country with the most to learn from Rangers’ collapse is Spain, where, like the SPL, the league is a duopoly where the two main clubs have grossly disproportionate clout. The difference is that the sums in Spain are much, much bigger. Over the past fifteen years, Barcelona and Real Madrid have engaged in a titanic arms race that has seen the two clubs pay the five highest transfer fees in history, at the cost of stacking up mountains of debt. While both clubs now look reasonably stable, the same would have been said of Rangers a year ago. A robust facade hides a deep vulnerability to the unexpected. The problem is, the unexpected will be the straw that breaks the camel’s back.

The debt spiral in European football has been claiming peripheral casualties for years. This may be remembered as the point where major clubs start going under. The onus is on leagues and governing bodies to protect the future of the game, lest it not be so beautiful anymore.




Post by Greg Bowler