Sport is facing a squeeze

2008 review: This was the year the bubble burst. After years of boom, a sudden bust has left the world of business reeling from overspending and easy credit.

Cristiano Ronaldo helped Manchester United won the Champions League final in 2008, beating Chelsea on penalties in Moscow. AFP

This was the year the bubble burst. After years of boom, a sudden bust has left the world of business reeling from overspending and easy credit. There can be no doubt that sport will be hit heavily by the recession that appears to be spreading to every corner of the globe. The biggest sport institutions across the world have been run as businesses for years, and only the most foolhardy of observers would bury their head in the sand and claim sport is less vulnerable than banks or retailers.

Sport is funded by bank loans and repayments are met by selling replica shirts, expensive entrance fees and over-priced burgers. When people cannot afford these clubs are in trouble, and with jobs being lost and people unsure where their next mortgage or rent payments are going to come from, watching your team drops down the priority list. English football can be taken as a prime example of the weakness of top sports clubs: Manchester United are the English, European and world champions, but are servicing debts of £667million (Dh3.58billion).

That debt stems from the controversial takeover of the club by the American Glazer family, who had experience of making money via sport with the American football team the Tampa Bay Buccaneers, in 2006. The Glazers took out bank loans to fund their purchase of the Old Trafford club, via a hostile take-over, and the debt is secured against the club's assets rather than the family's. It was this that caused such anger in England, where football clubs are seen as part of a community rather than objects to be traded like franchises - the system used in America - or money-making machines.

Interest payments are £62m a year. Even selling their star player Cristiano Ronaldo would not likely be enough for them to cover this. United are sponsored by the American Investment Group, which was bailed out by the US Government earlier this year. When this deal runs out they surely cannot hope to secure such revenue from their next sponsor. Chelsea, United's opponents in the European Champions League final, are £578m in the red but are kicking around thanks to loans from the owner Roman Abramovich. These loans are interest-free, but Abramovich was able to afford it courtesy the fortune made through oil in his native Russia.

But oil is selling for a third of the price it was fetching earlier this year. There are also reports in Russia he has asked for government money to bail out Evraz, a steel company in which he is a significant shareholder. What happens if he suddenly has to call some of the debt in? The construction at Stanley Park, expected to be the new home of Liverpool, is also on hold to due funding problems.

This is exactly what happened in business as the credit crunch hit home. The ability to borrow money to keep spending dried up, and suddenly cutbacks are being made everywhere. English football - collectively £3bn in debt - is based on borrowing money to fund expensive signings, based on the premise that supporters will keep paying £40 to watch a match, £50 for a new replica shirt every year and that TV companies will keep paying record fees for rights to show games.

2009 will be the toughest test yet for that premise. There have been plenty of experts lining up to claim sport is somehow different to other businesses and is well-placed to survive the recession. But when sport embraced the money of capitalism, it also embraced its weaknesses. Previously when clubs have hit trouble financially there have been buyers, Chelsea were a financial mess before Abramovich. But, the Sheikh Mansour bin Zayed-led takeover of Manchester City aside, there is suddenly little interest in buying - as Newcastle, West Ham, Portsmouth and Blackburn are all finding out.

One interesting danger on the horizon for debt-laden clubs is Michael Platini's suggestion of preventing clubs who owe money entering the Champions League, European football's big cash cow. Given Chelsea and United reached the final last season, and Liverpool got to the last four, and the three budget for extended runs, it could spell disaster for them. Football may have the biggest bubble that is in danger of bursting, but in motorsport the impact has already been substantial.

When the World Rally Championship starts again next year, Subaru and Suzuki will not be taking part. The car makers are suffering, so they cannot afford the expense. NASCAR, the American stock car series, say their sponsorship is down and teams are planning job cuts. The glamour of Formula One is not safe either, Honda are up for sale as the Japanese car makers cannot afford the massive cost of competing when they are struggling to save jobs. Even shaking off the excess baggage of supporting Super Aguri did not help.

Toyota's budget last season was US$446m (Dh1600m). Even the smallest budget, that of Force India, burned through $122m. Manufacturer teams make up more than half of the Formula One grid, with the private teams relying on wealthy benefactors and sponsors. Formula One is going around the world more than ever - Abu Dhabi will be the latest addition to the tour when it stages next year's finale - in an attempt to make more money. But while the sport's organisers pocket around $1bn a year, much of this is used to pay their own debts rather than distribute it to the teams. The organisers in France decided they could not afford to stage the Magny Cours event.

Sponsorship has collapsed. Events on the golf circuit are already dropping as banks and car makers end their associations with the sport, with the Indian Masters a recent casualty on the European Tour. The LPGA, the women's tour, is already down by three events and others will be at risk. A lasting legacy could see future events scaled back. Organisers of the 2012 Olympic Games will struggle to get more money out of the British government as the budget spirals beyond £9.5bn.