* Extension maturity to smooth out redemption peaks
* EU ministers may back more time for Portugal with conditions
By Matthias Sobolewski
BERLIN, April 9 (Reuters) - Ireland and Portugal should get seven more years to repay loans from the European Union to facilitate their return to full market financing, according to a recommendation from international lenders to EU policy-makers.
Such a move, if accepted, would mark a significant concession to Ireland, helping to seal its return to normal borrowing on markets, as well as offering a significant boost to Portugal as it struggles to push through spending cuts.
Ireland and Portugal got emergency loans from the European Union in 2010 and 2011 respectively after investors refused to lend to them at sustainable prices.
The average maturity of EU loans to Ireland is 12.5 years and to Portugal between 12.5 and 14.7 years depending on which EU fund provided the money. Ireland is to return to full market financing late this year and Portugal in 2014.
By extending the maturity, the payments are spread over a longer time, reducing the burden on the countries.
But Ireland will need to roll-over around 20 billion euros per year in 2016-2020 while Portugal will need the same amount per year between 2015 and 2021, a paper prepared for junior EU finance ministers and central bankers said.
The paper, seen by Reuters, was drafted by representatives of the European Central Bank, the European Commission, the International Monetary Fund, called the Troika, and the European Financial Stability Facility (EFSF).
It will be presented to European Union ministers who meet in Dublin on Friday and Saturday to discuss the extensions.
Because the meeting is described as informal, the ministers are likely to give only political support for the extensions for both countries with a formal decision to follow only next month.
But while Ireland is likely to get full support, the backing for more time for Portugal is likely to be made conditional on Lisbon finding new measures to fill a 1.3 billion euro gap in the 2013 budget following a ruling by Portugal's constitutional court that some of the earlier planned steps were illegal.
"That is the maximum one can expect," one senior euro zone official involved in the preparations for the meeting said.
While much of the debt that falls due between 2015-2022 for Portugal and Ireland is privately owned, it also includes IMF and EU loans.
Data on websites of the EFSF and the EU bailout fund ESFM shows that redemptions of EU loans account for 8.6 billion euros in 2016 for Ireland and almost 7 billion in 2016 and 8.7 billion in 2021 for Portugal.
Dublin and Lisbon have therefore asked EU ministers to extend the average maturity of the loans by 15 years since the EU redemptions would have to be financed by market borrowing.
The paper considered extensions of 2.5, 5, 7 and 10 years and more, rejecting the shorter extensions as not beneficial enough for the two countries.
The longest extension was too risky for future EU budgets, against which the EU borrowed on the market to lend on to Lisbon and Dublin through its European Financial Stability Mechanism (EFSM), the paper said.
"An extension of the maximum average maturity by 7 years would provide a balanced compromise between the lender and creditor constraints," the paper said.
"Such an extension would remove redemption humps in the post-programme period, provides a sufficiently large window for Portugal and Ireland to issue medium and long-term bonds which would not risk competing with EFSF/EFSM redemptions, smooth the debt profile well into the 2020s and hence send a strong positive signal to the markets," the paper said.
"The Troika partners and the EFSF would advocate to extend the maximum average maturity by seven years as it appears to be the best compromise accommodating the constraints and preferences of debtors and creditors," it said.