Malaga's progress to last eight highlights paradox of Spanish football's boom and bust culture

There is a hollow ring, though, to Spanish football's triumphalism. Malaga, the fairytale outfit in this year's Champions League, epitomise Spanish football's paradox. The finances of the club – it went out of business in 1992; Malaga CF rose from the ashes of the insolvent CD Malaga – are in disarray, along with those of dozens of other Spanish clubs.

The crisis is a reflection of what is happening at large in the Spanish economy, a country which hit a record five million unemployment rate in February, more than 26% of its working age population, according to latest Eurostat figures.

In recent years, 22 of La Liga's clubs have been involved in insolvency events, the result of an enormous football bubble. Last season, the kick-off for the league was delayed by a week because of a players' strike over unpaid wages. Clubs from the league's top division have racked up bank debts of €3.5bn, among them Valencia, who were taken over by the regional government in January.

Valencia have come a cropper chiefly because of poor property investments. The club ran out of money while building a new stadium, while it can't sell its existing stadium, the historic Mestalla. It also splurged on the transfer market. During the 2007/08 season, for example, along with clubs such as Atletico Madrid, Real Betis and Deportivo La Coruna, it spent more on its players than its entire operating revenues.

The clubs have been engaged in a disastrous arms race with Barcelona and Real Madrid, who top La Liga's debt table, with a combined deficit of approximately €1bn. Unlike their domestic competitors, however, the two behemoths of Spanish football have unrivalled earning power.

Take jersey sponsorship. Barcelona gets €30m a year from the Qatar Foundation; Real Madrid pulls in €20m from bwin, the sports betting company. The other 18 top-tier clubs in La Liga receive €10m between them. Last season, almost half of La Liga's first division clubs actually started the season without a shirt sponsor.

The problem of TV sponsorship is even more pronounced. There is no collective bargaining between Spanish clubs for La Liga rights. Each negotiates individually, unlike, say, the English Premier League where there is a 1.5 multiple between the first and the last earning club. In La Liga, Barcelona and Real Madrid, who netted about €140m each last season, made five times more than Malaga and 11 times more than the bottom team.

That's for one season. The cumulative effect is more alarming. As the Sevilla president Jose Maria del Nido complained: "The two giants have earned €1500m more than the next club [Valencia] in the last 10 years." And you wonder why Valencia offloaded David Villa, David Silva, Juan Mata and Jordi Alba over the last three seasons?

Last week, members of the European parliament denounced La Liga's profligate ways, wanting to know how the clubs could justify paying multi-million wages to its galacticos while amassing tax debts of €692m when Mariano Rajoy's Spanish government was withdrawing medical services to immigrants and pocketing €40bn in aid from eurozone taxpayers.

Bayern Munich's president Uli Hoeness put it in stark terms when asked last season about the mollycoddling of Spain's clubs: "This is unthinkable. We pay them hundreds of millions to get them out of the s**t and then the club don't pay their debts."

Outraged MEPs are waiting for a response from the Spanish government before launching an investigation similar to one which is examining how €10m of public aid was siphoned off by a series of Dutch football clubs such as PSV Eindhoven.

Malaga, meanwhile, which has never won a major trophy and is playing in its first Champions League, topped their group, finishing unbeaten, and overturned Porto in the last round. They will fancy their chances against Borussia Dortmund, when they meet tomorrow night in the first leg.

It has been an improbable journey. The club is banned by UEFA from playing in next year's tournament owing to "significant overdue budget balances". It is scheduled to have an appeal hearing on 14 May with the Court of Arbitration for Sport.

Until recently they were in clover. During the 2010 World Cup finals, Qatari Sheikh Abdullah Bin Nasser al-Thani bought the club. Word was that they would challenge the Barca-Madrid duopoly in La Liga. Oil money poured in – €60m for player signings in the summer of 2011, more than Barcelona or Real Madrid; the cool, canny Chilean Manuel Pellegrini, who dragged Champions League debutants Villarreal to the semi finals in 2006, took over management of the first team; Fernando Hierro, outgoing sporting director of the Spanish Football Federation, was brought on board as a director.

Then, all of a sudden, the money dried up. Players went unpaid. Ruud van Nistelrooy and three teammates threatened to make a formal complaint at the end of last season. A former owner was still owed €3m. Villarreal and Osasuna's bills for transfers weren't paid.

Hierro left. The club's best players were sold, including Santi Cazorla to Arsenal for €14m, the cut-price fee constituted "a gift" in Pellegrini's opinion; Nacho Monreal joined Cazorla in London during the last winter transfer window. The big Venezuelan striker Salomon Rondon went east to Rubin Kazan.

But Malaga have slalomed along. They're a point behind fourth-placed Real Sociedad in La Liga. The local 21-year-old Isco has been sublime, another in the production line of suave Spanish playmakers. His direct dribbling style, fleet-footedness and long-range shooting bring to mind an early, effervescent Paul Gascoigne. He may be the next to go after receiving covetous glances from the top two in Spain and England's monied hegemony.

Embattled financially, it remains to be seen where Malaga go from here. For now, they're merely enjoying the ride.

Richard Fitzpatrick is the author of El Clásico: Barcelona v Real Madrid, Football's Greatest Rivalry, published by Bloomsbury