Bavarian Financial Works: State of the market

While the transfer window is open it is a good time to have a look at just how the market for football talent is changing and why. As Bayern Munich moves through the critical process of extending the contracts for key midfielders Joshua Kimmich and Leon Goretzka, the media talks about which of our players might leave, and where they might go. Bayern management, conversely, are playing their cards close to the vest, saying very little about finances, negotiations, potential acquisitions, or want-a-ways.

The market for top football talent is changing, with many of these changes caused by the COVID pandemic. How teams are responding to the drop in revenues and the shape of the regulatory schemes that bind them are setting this up to be a great market for some teams, and a disaster for others.

In Spain, for the past several years fan-owned behemoths FC Barcelona and Real Madrid have been hanging onto their top financial status through borrowing money to compete with the Sugar Daddies and cash flush EPL teams. Barca is carrying somewhere around 1.2 billion euros in precariously structured debt, while Real Madrid is carrying a no less impressive debt load of over 900 million euros, albeit in easier to manage longer term debt.

All on its own this amount of debt would be problematic, but combined with La Liga’s revenue based “salary cap”, or spending limitations, it has the potential to prove a serious setback for the two biggest teams in Spain. Barcelona is so far in violation of the cap they have not allowed to register any of the players they have signed so far this season, and they will have to shed a remarkable amount of salary to be allowed to compete this year, and need to somehow find money to pay Messi to come back. There is reporting that Antoine Griezmann, who they recently paid 125 million euros for, will be allowed to leave for free, and further rumours that Atletico Madrid not only want him for free, but that they are holding off completing the deal to force Barcelona to pay part of his wages.

The math is compelling, and for a Barcelona or Real Madrid fan, concerning. The fine folks at The Athletic have sharpened their pencils and drawn this conclusion:

The long and short of it? Barcelona, as The Athletic has explained, are reportedly set to have a limit of around £138 million (€160m) on wages and transfer spending for the coming season. Real Madrid’s limit could be a little more palatable — thought likely to be around £255 million (€300m). For context, Barcelona’s salary cost limit was £579 million (€671m) for the 2019-20 season, and Real Madrid’s was £553 million (€641m).

Put in more concrete terms Barca will have to get their wages down to about AC Milan levels while Real will have to come down to about Juventus levels.

Barcelona is already scrambling to find creative ways to keep and register talent (including signing players to the B team, and offering Messi a “job for life” after his playing days to get him “off the books” income). But Spanish accountants are going to have to put on a Cirque du Soleil level performance to make it all work.

On the other end of the big team scale, the Sugar Daddy clubs are well positioned to take advantage of loosening of the FFP regulations that allows teams to respond to the COVID-19 pandemic economic impact. FFP has been partially suspended for a short period and some of the barriers from bringing in non-arms-length capital loosened as well. A new accounting process for FFP should be in place by the end of the year, although the details have not yet been thrashed out. This creates a window for the externally supported clubs to load up on talent. It is not a new strategy as Manchester City went on a spending spree before FFP was first implemented and RB Leipzig spent twice as much on incoming transfers as the rest of the league combined in their last year in the 2 BL. This tactic, sometimes called “priming the pump”, allows these auspiciously placed clubs to load up on talent before the regulations slam back into place to create a competitive advantage that can last for years.

What does this mean for the course of the summer? It means City can go on the hunt for Jack Grealish and Harry Kane, Paris Saint-Germain can continue shopping, and Chelsea FC can continue to stockpile talent for immediate and future needs. And in case you were thinking that our beloved Bundesliga was immune to this problem, the German media is reporting that it looks like Leipzig will be completing just under 200 million euros of incoming transfers this window.

And where does this leave Bayern? The simplest answer is; somewhere in the middle. We are not carrying crippling debt, nor are we chained by a league imposed salary or expense cap. On the other hand we don’t have access to non-football related vaults of cash to go shopping with. From a pure financial perspective we are better positioned than the Spanish giants, but can’t spend someone’s else money either. This could all change again as COVID impacts lessen and FFP returns to a more normal state, but for this summer it could make for a very wild ride.