Brazil's growing military is the real game-changer in the Falklands, and it's taking Argentina's side. Above, Brazil's president Dilma Roussef holding her grandson. Photo: Rede Brasil Atual

Imagine, for a moment, the Admiralty’s nightmare scenario: in the not-too-distant future, a nearly bankrupt Argentine government invades the oil-rich Falkland Islands. For the second time in half a century, Las Malvinas—the islands of Latin America regarded as a stolen piece of Argentina—spark a war meant to divert public attention from the Argentine government’s economic failings.

With twenty-first century budget cuts biting hard, Britain has no aircraft carrier. Argentina retired its own carrier in the late 1960s. Yet, unlike 1982, when Margaret Thatcher dispatched a flotilla to retake the islands, this time the South Atlantic is anything but empty. It’s home to a Brazilian carrier, the São Paulo, along with a fleet of nuclear-powered attack submarines being built in partnership with Argentina.

In effect, these weapons give Brazil the ability to impose an updated version of the Monroe Doctrine on regional waters. Call it the “Lula Doctrine.”

With its new confidence and military ambition, Brazil is a vocal advocate of Argentina’s claim on Las Malvinas. While few can imagine Britain and Brazil ever coming to blows, signs of a very different reality for Britain are starting to take shape.

Brazilian President Dilma Rousseff may seem an unlikely champion of a military buildup. Four decades ago, the Brazilian military dictatorship tortured her when she was a young guerrilla fighting their rule.

Yet, starting under Lula and slowly accelerating, Brazil has significantly expanded its military power—particularly its naval power, and Rousseff has kept the pace. This will change the dynamics of the southern Atlantic significantly, creating a true Brazilian “zone of exclusion” extending deep into the ocean above the oil riches recently discovered there.

But it also means that, for the United States and Europe, accustomed to dictating events on the high seas—particularly in the Atlantic—some important facts will change, especially with regard to the long-running Falklands/Malvinas dispute.

Brazil’s 2009 decision to build a fleet of five nuclear attack subs took Western military experts by surprise. Expected to start entering service in 2016, the submarines promise to dramatically alter the balance of power in the South Atlantic.

Lula, who led the push for the nuclear sub program, said before leaving office that the subs were “a necessity for a country that not only has the maritime coast that we have but also has the petroleum riches that were recently discovered in the deep sea pre-salt layer.”

The last time this scenario played out, Britain won the day and the United States backed its European ally—even privately offering to lend it one of America’s huge aircraft carriers (an offer turned down because of the complexities of operating one on such short notice).

In 1982, when the Argentine junta led by General Leopoldo Galtieri invaded the islands, Britain mustered a small but potent fleet of aircraft carriers, submarines, and surface ships to support a Royal Marine landing force that retook the islands. The retaking of the Falklands became emblematic of Thatcher’s determination that Britain not sink to third-class status. Yet it also left a deep scar on the Latin American psyche.

Brazil and other Latin American countries backed Argentina during the war but, mired in a regional debt crisis, had little diplomatic clout even fewer military options. This humiliation has left a lasting imprint, in particular, the sinking of the Argentine light cruiser General Belgrano, a hulking relic of World War II, by the nuclear attack sub RNS Conqueror. The loss of her 323 sailors is to many in Latin America what the Alamo is to Texans.

Until recently, experts regarded the Falkland Islands as an unlikely place for further trouble. But the discovery of oil in the North Falklands Basin in 2007 changed this. As a result of Argentina’s near-perpetual state of bankruptcy and Brazil’s new assertiveness on the world stage, sensitivities over the disputed islands have risen.

In January 2011, for instance, Brazil refused a small British warship, HMS Clyde, permission to dock in Rio de Janeiro. Neighboring Uruguay turned away the British destroyer HMS Gloucester in 2010.

In Britain, meanwhile, the commander of the 1982 Falklands fleet, Admiral Sir John Woodward, has complained publicly that current defense cuts likely would leave the Falklands helpless in the face of a new Argentine invasion, leading to political pressure to reinforce the British garrison.

But Brazil’s submarines change the naval balance of power in the region even more dramatically than Britain’s own defense woes. British strategists worry that Brazil may now demand that foreign powers simply steer clear of its backyard as the United States did in the nineteenth and twentieth centuries.

Brazilian officials have been careful not to portray the subs as a response to any outside threat as they continue to support Argentina’s Malvinas claim in international bodies. But it is just one of dozens of ways in which the relative decline of US power, and the more precipitous retreat of its European partner, will change the world. Gentle giant or not, Brazil’s backyard will have to be respected.

Michael Moran is editor-in-chief of Renaissance Insights, the in-house think tank of the global investment bank Renaissance Capital, and author of The Reckoning: Debt, Democracy and the Future of American Power, just released in the UK by Palgrave Macmillan.