You may have heard that the Euro is having heart palpitations recently. Problems that have been simmering in the Eurozone periphery for two years are coming to a head, Greece is boiling over and Italy, Spain and Portugal are next in line if European leaders cannot turn down the heat. Unfortunately there is no resolution in sight as the 17 Euro-member countries, most markedly Germany and France, are unable to decide on a rescue plan for the monetary union. In the best case bondholders will take losses on national debts and massive amounts of cash will be shoveled onto European banks; in the worst case there will be absolute financial chaos.

So what does this mean for soccer in Europe?  The key factor in play is the likely rise in borrowing costs, a very unwelcome development for the notoriously debt-dependent soccer economy. Assuming the Eurozone does not fall apart and banks survive, there will be a big move to ‘de-risk’ balance sheets, which would likely involve pushing soccer club loans out the door in favor of safer investments. It seems counterintuitive that lending would become scarce at a time when mountains of cash will be in circulation but that is exactly what happened in America. Policymakers opened up the liquidity taps to reinflate banks but saw no increase in lending because of a variety of restrictions, problems and a general loss of risk appetite. This is likely to happen in Europe as well. Despite huge amounts of liquidity financing is likely to dry up completely for the smallest clubs and significantly more expensive for the rest.

For an example of the impact increased financing costs would have let’s take a look at the Premier League.  In the 2009-2010 season EPL clubs had a total of £1.6bn of interest bearing debt outstanding, with financing costs of £174m or an average interest rate of 10.6%*. Every 1% increase in the average interest rate translates into a £16m increase in interest payments. This looks like a small number at first but consider that the burden is not distributed equally; several large clubs are financed by non-interest bearing ‘soft-loans’ from their owners, while the rest rely on bank debt or other vehicles which would be affected by an increase in rates. Consider that operating profit, a metric which omits interest costs, of the 2009-2010 Premier League was a scant £83m, with much of the profit attributable to the top clubs and much of the loss coming from the rest. Including net interest and transfer expenses swings the EPL to a £445m loss, a figure which speaks volumes about the league’s addiction to cheap financing.

As is often the case those in the worst shape would be hit the hardest. If the average rate were to increase by 300 basis points it would likely sink four or five Premier League members forcing sales in most cases. And whereas the Premier League would be rocked, it is hard to say the Football League would be anything short of devastated. The Premier League is not alone, La Liga and Serie A clubs have similar debt levels and are equally at risk from a financing crunch. Whether an individual club is affected depends most on its management and the resources available to the owner. Is the club financed by a benevolent, minted owner unworried about cash? Things will probably be OK. Is the club carrying a heavy debt burden owed to banks or bondholders? Things might get a bit rough.

However things pan out on the individual level it seems likely that the Euro crisis will strengthen the wave of economic polarization sweeping through European club soccer. Clubs in strong financial positions will benefit from a lack of competition for playing talent and further reinforce their league status at the cost of weaker rivals. It is a trend that should worry underdog supporters everywhere…at least until they can find a friendly billionaire looking for a good punt.

*Profitability and interest figures from Highlights of Deloitte’s Annual Review of Football Finance 2011