Back when Aldershot Town went bust in 1992, it was big news. The relative rarity of a football club being liquidated enough to generate items on the national news where comparisons were made with the last club to suffer the same fate – Accrington Stanley in 1962, but these days football clubs hitting the financial skids is hardly news at all, more a regular occurrence that all supporters can expect to experience at least once in their lifetimes.
The strange thing is that although it’s stagnated of late English football has been on a fairly dramatic and long-term upswing since the mid 1980s with rising attendances, better, safer grounds, and a growing global profile not to mention a record TV deal in the billions, yet this successful period has actually seen more clubs encounter financial problems than the long years of post-war decline.
The reason for this is that strangely a club going bust is not, as you would think, the result of failure, but of success. At least by my reading of some economic theories which seek to explain financial boom-bust cycles.
In the book dealing with the economic crisis, Capitalism 4.0, Anatole Kaletsky summarises the theories of Hyman Minsky an American economist who he says:
argued in the 1960s that long periods of economic stability would lead to conditions of financial overconfidence that would, in turn, promote leverage and exaggerate risk-taking and increase debt burdens throughout society.
But, whilst this may explain the banking crisis, what does it say about football? The key point is that banks are more likely to lend and that football clubs are more likely to take on debt not when times are bad, but when the times are good – as they have been for over two decades. This explains how clubs became increasingly leveraged. Certainly a deal such as that which brought the Glazer’s to Manchester United would have been unthinkable at a time when the fortunes of the game were dwindling rather than at a time when there a the not unreasonable expectation that fans will keep on paying more for tickets and television revenues will keep on increasing.
Though such predilection for increased debt and greater risk on the part of clubs and banks do not necessarily risk the whole game collapsing – for now – such behaviors can nevertheless prove highly damaging to individual clubs caught up in an environment of over-exuberance. Another theory outlined by Kaletsky, George Soros’s theory of reflexivity. can be used to explains how individual clubs can become caught in a cycle of over-confidence. As Kaletsky explains the theory essentially concerns the two-way interaction between perception and reality:
Imagine that house prices have been rising for a period, perhaps because they are recovering from a previous bust. The rise in prices may encourage overoptimism about future housing demand and make houses appear more attractive to bankers as collateral for mortgage loans. The increased availability of mortgages pushes up house prices, thereby justifying the original optimism about them.
This cycle continues to a point where perception becomes so far divorced from the fundamental reality that it is untenable and a bust occurs So how can this relate to individual football clubs? The answer is that most clubs, at whatever level, who go bust do so following a recent run of success; Leeds in the Champions League, Portsmouth having won the FA Cup, Southampton having reached the FA Cup final, Bradford reaching the premier league, Truro achieving five promotions in six seasons, Rushden and Diamonds climbing to League One, Weymouth achieving promotion to the Conference, the list goes on…
It is quite a popular notion that football clubs have a ‘natural’ level. Though I have argued elsewhere this is changing, for the time being at least a clubs fortunes are generally linked to the level of support it receives from its surrounding area, not just fans paying to watch games, but also sponsorship from business in that area. Population is therefore usually a good indicator of a clubs ‘natural’ level in that most top sides are from major urban areas with a large population.
If we accept that each club has a level then this is in effect the fundamental reality. Like the example of house prices a club may have a particularly good season, achieving promotion. This may be for a number of reasons: because the club is below it’s level and simply rising to it’s rightful level, a particularly good manager, or even luck. The problem is then if this success is misinterpreted as a shift in the fundamentals resulting in the cycle of over-optimism. So Bradford City who had achieved Premier League status by a narrow margin become seen as a ‘big’ club leading to more investment, loans and financing. This may even produce further success which in turn reinforces the cycle, but all the while sustainability is being stretched to beyond the point it can be supported by the fundamentals which simply cannot afford a player on £40 000 a week, so it is with some inevitability that the over-inflated club will at some point come crashing back to earth.
The two theories together therefore explain why the majority of football clubs go bust; Firstly the growth of the game over the past two decades has resulted in a greater availability loans and finance and an increase in the number of risky transactions. This has in turn facilitated bubbles whereby some clubs taking advantage of the availability of finance become caught in a cycle of drastically over-extending themselves far beyond a level which their fundamentals can sustain.