Brazilian Stocks Fall, Led by Aracruz, Banks; Bolsa Declines

By Paulo Winterstein and William Freebairn

Oct. 3 (Bloomberg) -- Brazilian stocks fell to the lowest since April 2007 as Aracruz Celulose SA, the world's biggest pulp producer, reported it may lose about $1 billion from derivatives and banks slid on the prospect of worsening credit conditions.

Aracruz dropped the most in 14 years after Morgan Stanley cut its profit estimates and Merrill Lynch & Co. downgraded the stock to ``neutral'' from ``buy.'' Votorantim Celulose & Papel SA, which plans to merge with Aracruz, slid more than 10 percent. Uniao de Bancos Brasileiros SA led declines in banks even as Congress passed a $700 billion financial-market rescue plan designed to unlock credit markets.

``You had a patient with a very high fever, almost in convulsions, and when you administer the medicine you come back to a lower temperature,'' said Ures Folchini, head of proprietary trading at WestLB AG's Brazilian unit. ``It will take a while for things to return to normal.''

The Bovespa index slid 3.5 percent to 44,517.32. The weekly decline of 12 percent was the most in six years. The BM&FBovespa MidLarge Cap index dropped 3.4 percent, while the BM&FBovespa Small Cap index slipped 3.7 percent. Mexico's Bolsa dropped 4.3 percent, while Chile's Ipsa retreated 2.4 percent.

Aracruz slid 25 percent to 4.85 reais, the biggest drop since at least August 1994. The company said the ``fair value'' of its currency-related derivative contracts at the end of last quarter was negative 1.95 billion reais, or $1.02 billion, after Brazil's real slumped. The accounting loss from derivative transactions is ``higher than what the market was expecting,'' Morgan Stanley analysts, including Carlos De Alba, wrote.

``We expect the negative short-term impact on the company's shares to persist, also affecting'' Votorantim shares, Unibanco analysts wrote.

Votorantim fell 11 percent to 22.99 reais. Brazil's third- largest pulp and paper maker agreed in August to pay 2.71 billion reais ($1.5 billion) to double its stake in Aracruz.

Banks Fall

Unibanco dropped 10 percent to 16.32 reais.

Brazil eased requirements on reserves that banks must keep at the central bank for the second time in two weeks in response to worsening credit conditions sparked by the international financial crisis.

``The central bank is being proactive, acknowledging that liquidity restrictions have increased in Brazil,'' Deutsche Bank AG analyst Mario Pierry wrote in a note to clients. ``This is the third measure implemented by the central bank in two weeks to improve liquidity conditions in the money market.''

Stocks had rallied earlier today on speculation the $700 billion bank bailout package would pass.

U.S. Bailout

The U.S. legislation, a bipartisan effort to restore confidence in the nation's banking system, authorizes the government to buy troubled assets from financial institutions reeling from record home foreclosures. The bill contains $149 billion in tax breaks and affirms regulators' power to suspend asset-valuing rules that companies blame for fueling the crisis.

``The package is without a doubt positive but it doesn't solve all the economic problems,'' said Italo Lombardi, economist at Roubini Global Economics LLC in a Bloomberg Television interview. ``It will help a bit some individual institutions but it doesn't guarantee that the system will begin to offer more credit.''

Mexico's Bolsa index had its biggest weekly decline in eight years. The daily drop was led by retailers on concern the U.S. economic slowdown will be prolonged and spread to Mexico.

Controladora Comercial Mexicana SAB, the owner of supermarkets and Costco stores in Mexico, fell the most in two weeks after Banco Santander SA said the company may report ``modest'' third-quarter results. Comercial Mexicana may say third-quarter net income fell 75 percent and sales at stores open at least a year grew 3 percent, Santander analysts Joaquin Ley and Roberto Liano wrote in a research note today.

Comercial Mexicana retreated 8.2 percent to 22.37 pesos.

Argentina's Merval fell 0.5 percent. Colombia's IGBC and Peru's Lima General index were little changed. The MSCI index of Latin American shares dropped 4.8 percent and had its biggest weekly decline in 18 years.

To contact the reporter on this story: Paulo Winterstein in Sao Paulo at pwinterstein@bloomberg.net; William Freebairn in Mexico City at wfreebairn@bloomberg.net.