NEW YORK - July 21, 2011 - Standard & Poor’s reiterated on Thursday it sees a real risk that future U.S. government deficits may meaningfully miss discussed targets and that there is a 50-50 chance the U.S. AAA credit rating could be cut within three months, perhaps as soon as August.

The deficit reduction debate is coming up against an August 2 deadline when the US $14.3 trillion limit on the United States’ borrowing capacity is exhausted, putting in jeopardy payments on U.S. Treasury debt as well as paychecks for federal employees and soldiers.

If an agreement is reached to raise the debt ceiling but nothing meaningful is done in terms of deficit reduction, the U.S. would likely have its rating cut to the AA category, S&P said.

“While banks and broker-dealers wouldn’t likely suffer any immediate ratings downgrades, we would downgrade the debt of Fannie Mae, Freddie Mac, the AAA-rated Federal Home Loan Banks, and the AAA-rated Federal Farm Credit System Banks to correspond with the U.S. sovereign rating,” S&P said in its report.

“We would also lower the ratings on AAA-rated U.S. insurance groups, as per our criteria that correlates insurers’ and sovereigns’ ratings,” the firm said.

However, S&P said it sees a failure to reach an agreement on raising the debt ceiling and reducing deficits as the least likely scenario, adding that in such a case the global financial markets would be in turmoil.

In such a hypothetical case, it envisages the U.S. Treasury curtailing spending sharply and the U.S. Federal Reserve launching another round of quantitative easing to help prop up the economy.

“Under this scenario, we expect that interest rates could rise - say, 50 bps on short-term rates and double that on the long end - though this may depend on whether Treasuries lose their status as the safe haven that investors have historically perceived them to be, or physical assets such as gold benefit from such a flight to quality,” S&P said.