Brazilian Soccer Is Too Big To Fail

Raul Gallegos is a Bloomberg View contributor, who covers Latin American politics, business and finance. He was a columnist for Reuters and a correspondent for Dow Jones and the Wall Street Journal. He is a graduate of the University of California at Berkeley and Columbia University. He grew up in El Salvador and is based in Colombia.
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To understand Brazil's economic woes, one should consider how politics has ruined the country's most venerated sport.

It's no secret that the economics of the Brazilian soccer world are dysfunctional. For the most part, teams are poorly run, member-controlled organizations with histories of financial mismanagement, run by overpaid managers with little accountability. For years, soccer clubs stopped paying taxes and evaded social security obligations. And the government often rescued them from financial failure -- as it may be about to do again.

According to an October piece in the Folha de S. Paulo newspaper, Brazil's soccer clubs have run up a 4.8 billion reais ($2.1 billion) tab with the federal government. Approximately 36 percent of the total debt owed by clubs is due in the short term, according to an Oct. 25 analysis by consulting firm Pluri Consultoria. Soccer teams are heavily leveraged, and their profitability (the average profitability of the top 25 teams is 0.7 percent of annual sales) is almost nonexistent. "It is possible to say, with no shadow of a doubt, that soccer clubs would not be standing" if they operated as companies, Pluri warned.

As Vilson Ribeiro de Andrade, president of theCoritiba Foot Ball Club -- a debtor -- said in the Folha article, the government's bill is "virtually unrecoverable." This is not flattering for a country that boasts five FIFA World Cup titles and is set to host the event next year.

And so,legislators are consideringa controversial new proposal that would absolve the game's worst tax cheats. The disarmingly named "Program for the Strengthening of Olympic Sports" law proposal would apparently wipe out about 90 percentof the clubs' fiscal debts and allow teams as long as 20 years to pay off the remainder of what they owe. In exchange, soccer clubs would be obligated to help train Olympic athletes.

Letting clubs off so easily does not sit well with some. In an editorial Monday, Folhademandedthat the teams should at least agree to adopt standard business-management practices and make officials accountable for mismanagement in exchange for debt forgiveness. "The debts are not responsible for causing the administrative negligence of the clubs -- but the other way around," the editorial said.

Henrique Alves, president of Brazil's Chamber of Deputies, gave a rather weakexcuse for the proposed bailout last week: "Soccer, especially, is a source of happiness, socialization and integration of the Brazilian family." Alves's transparent move to rescue the sector suggests that Brazil's soccer teams have also mastered the game of politics.

In a soccer-obsessed nation, politicians fear losing voters if they push teams to own up to their fiscal mistakes. Squeezing clubs financially could hurt their ability to hire talent and weaken their performance. This could prove unpopular with Brazil's poor, for whom soccer is not just entertainment, but also a means of upward social mobility for talented players from the slums. Teams understand this political reality and have long taken advantage of it.

This partly explains why having the state lend a hand to troubled teams is a Brazilian tradition. In 2008, Brazil's government introduced Timemania (Team Mania), a lottery game that includes 80 teams and is meant to generate enough proceeds to help pay what clubs owe the government. In addition, Brazil has led three refinancing programs for financially strapped clubs over the past 15 years. The bill under consideration by legislators is the latest version of a recurring story.

Attempts to professionalize the sport have failed. Even legendary soccer star Pele went nowhere fast with the "Pele Law" he helped usher in when he became the country's sports minister in the 1990s. The legislation was meant to push teams to become professional sports businesses and to regulate the relationship between players and employers. But interest groups managed to water down the law over time.

These days, even the richest teams have trouble with cash flow. When Rio de Janeiro's Flamengo -- Brazil's fourth-largest clubas ranked by 2012 revenue -- struggled to pay soccer star Ronaldinho last year, the player's agent and brother, Roberto de Assis Moreira, apparently attempted totake more than 40 items without paying, including shirts and hats, from the club's store in protest. "Flamengo aren't paying my brother, so I'm not paying, either," he allegedly told the store's staff.

Brazil's soccer teams now feel empowered to make their own rules. The Confederacao Brasileira de Futebol, or CBF, a member organization controlled by soccer teams, suggested earlier this year that in exchange for longer repayment times, it would offer to penalize member teams that default on tax debt or delay wage payments to players. CBF suggested it could go so far as to bar noncompliant teams from games. That's about as realistic as expecting a World Cup final to run smoothly without referees present.

Romario, the World Cup player turned lawmaker,took a shot at the absurdity of that proposal: "Do you really think that the CBF has the moral courage and the ability to make Vasco, Flamengo or Corinthians fall because they did not pay debts?" His answer: "That's a lie. This won't happen. This is a utopia and will not exist."

An amendment to the Pele Law that President Dilma Rousseff signedin October, intended to increase sports teams' financial transparency and limit the tenure of executives running sports institutions, is a good call. But rewarding clubs for their notorious incompetence is not. Brazilian politicians managed to botch the country's economic resurgence by not getting out of the way. But on the soccer field, Brazil's role as a strong referee is not just desirable, but also necessary.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.