The Declan Rice deal dispute highlights how inflation has changed remittances

right arrow

Declan Rice is set to become the most expensive British footballer of all time after West Ham United and Arsenal agreed a guaranteed fee of £100m ($126m) and a further £5m in add-ons.

There were prolonged squabbles over the amount, with treble-winning champions Manchester City making a surprise late bid of £80m with a further £10m in add-ons before being outbid.

Whilst clubs will always haggle over the size of the transfer fee, an important factor in this particular deal was its structure – which has yet to be confirmed in detail – with West Ham wanting more money up front and Arsenal favoring distributed payments. in installments.

This type of contention is becoming increasingly common in the world of football transfers, a market that, like anywhere else, grapples with how to manage high interest rates and rampant inflation.

In the decade and a half since the recession at the end of the 2000s, economies in developed countries have been defined by two major things. First, interest rates—which determine the cost of borrowing money—were close to zero. Second, inflation—the rate at which the cost of goods and services increases—was low.

This meant that borrowing money was cheap, and paying for things in installments instead of upfront made little difference because the value of cash wasn’t eroded as much by inflation.

But now, high inflation, as with everything else, has an impact on how football clubs manage their finances, with those buying and selling having different incentives when it comes to transfers.

Rice with West Ham chairman David Sullivan (Photo: Tim Goode/PA Images via Getty Images)

“From a cash flow point of view, there are considerations,” says football finance expert Kieran Maguire on the impact of inflation. “(Selling clubs) cash is preferred now because of inflation – the ability to buy is diminishing.”

Take a hypothetical player transfer of £20m paid in four annual instalments of £5m. In a world of high inflation, the value of the final payment that arrives in three years is much less than the down payment that is made now. On the one hand, such an arrangement would be favorable to the buying club as it actually pays a lot less in that final year.

The cost of running a football club continues to rise, and is passed on to fans in the form of expensive tickets and merchandise. For example, energy prices have risen dramatically in the UK over the past year, while wages have also increased rapidly. In April, the national minimum wage (for those over 23) rose from £9.50 an hour to £10.42 – an increase of 9.7 per cent.

All of this adds to the incentive to get funds from transfers up front.

Although there is a distinction. Everything discussed in this article has to do with cash flow between clubs – how much money they send and receive between clubs. This differs from the concept of “amortization” accounting, which refers to how transfer fees are recorded in the books of clubs.

When a club buys a player, these payments are generally spread out — amortized — over the length of that player’s contract rather than falling entirely in the year the player was purchased.

For example, a £50m transfer of a player on a five-year contract in five installments of £10m would appear in the buying club’s accounts (however, for the selling club, it appears to be all at once in the first year).

These accounts are part of the Financial Fair Play (FFP) regulations, which govern the amount a club can spend. This week, UEFA decided that transfer fees can only be amortized for a maximum of five years after clubs – notably Chelsea – came under fire for signing players on longer contracts.

This is an issue entirely distinct from cash flow to clubs.

However, Dr Rob Wilson, football finance expert at Sheffield Hallam University, explains that depreciation has had a significant impact which, along with inflation, has led to more consideration of paying in installments in the game.

This reflects broader trends in society, particularly when interest rates are low; Many people have bought consumer goods such as cars or electronics in installments instead of one lump sum delivery. But this payment method has suddenly become more expensive.

Dr. Wilson says that the increase in premiums actually predates the recent rise in interest rates and inflation.

“Covid was kind of a turning point for him, the volume of trade that started through an organized payment structure,” he says, highlighting the example of Cristiano Ronaldo’s £80m transfer from Manchester United to Real Madrid in the summer of 2009, with the club paying Spaniard full refund immediately.

Ronaldo scouting in Madrid in 2009 (Picture: Denis Doyle/Getty Images)

“Now it is much more usual to distribute transfer fees.”

This is often beneficial to the buying club, as it means they have more money in the bank to make more transfers in the short term. However, it could mean that they are saddled with their payments for a long time. Wilson highlights Manchester United as a club currently experiencing this problem.

This is supported by Maguire, who notes that at the end of the 2021-22 season, Premier League clubs owed £1.87bn in unpaid transfer fees. He says this may explain why some clubs were quiet on the market last summer, when they already had significant transfer debt to deal with.

Maguire agrees that in a world of high interest rates and high inflation, there is growing pressure from selling clubs to get more money out of those who are buying upfront.

“It’s about bringing money into your business as quickly as possible,” says Wilson. “If I told you, ‘Do you want £1,000 now, or in 12 months? You can say “now”.

This may seem obvious but for so long, with the value of money relatively constant, there was surprisingly little difference.

There is an option for clubs who are paid in installments but want more cash up front – they can use finance to load money up front.

Taking Rice as a hypothetical example, Maguire explains how this could work: “(West Ham) will say, ‘We have three IOUs from Arsenal’ and they pay those installments due.”

Of course, doing so involves paying interest, and that cost has risen significantly in recent months.

Maguire makes clear that this type of arrangement, of which Australia’s Macquarie Bank is a popular provider, doesn’t just happen for remittances. Leicester City and Southampton have both done so with projected Premier League broadcasting revenue, leaving them in a difficult position after being relegated last season. West Bromwich Albion did the same for parachute payments awarded when clubs from the Premier League were relegated to the Championship.

This allows clubs to spend money now, whether it’s paying off other debts on new signings or simply keeping the business going – at the cost of having less money to spend in the future.

“Borrowing is not a bad thing but it locks you into these payment terms,” ​​says Wilson. “But the more money you have to pay on a monthly basis, the less flexibility you have to do other things.”

The cultural trend of “buy now, pay later” is now deeply rooted in the world of football transfers.

But with the global economy changing dramatically, there is an increasing importance of having cash in banks right now.

(Top photo: Ben Stansall/AFP via Getty Images)

Leave a Reply

Your email address will not be published. Required fields are marked *

Back To Top