DEFENCE minister Willie O'Dea is in "on-going discussions" with finance minister Brian Lenihan with a view to purchasing two new vessels for the Irish navy this year.

O'Dea said Lenihan (pictured) is "quite sympathetic" to the need to replace two ships ready to be retired in the next year and to maintain a naval fleet of eight despite a hugely difficult budgetary situation. He said the ministers are "working on some proposals".

Due to the global recession and intense competition in the sector, O'Dea said the government had been made some "excellent offers" for new ships and it would "drive a very hard bargain". He said he was confident there would be "some developments" next year.

O'Dea said he accepted the defence department had taken a "lot of pain", with cutbacks of €45m in the defence budget. But he said €12.5m of cuts would come from planned changes in the overseas deployment of troops.

There are 44 Irish troops in Bosnia, while the cabinet recently agreed that they would continue there for the present. They will effectively be withdrawn by July, while the 240 troops in Kosovo will be scaled down to about 50 in April. "We should be out of it by October," O'Dea said, He added that Irish troops "will be staying in Chad".

The government had decided the focus "from here on in" would be on "niche deployments", citing the example of Afghanistan where seven Irish soldiers are serving on a UN-mandated mission in a planning and organisation role at headquarters and not on the front line.

Commenting on the banking situation, O'Dea, a former lecturer in finance, said that Nama was "the only solution", but he said that "it looks to me, from what I'm hearing and from what I'm seeing in the stock market, that the valuations of those properties are falling somewhat short of what was originally envisaged, which requires bigger, higher capitalisation from the banks."

Asked if he thought one of the two main banks would be in state hands by this time next year, he said: "If you look at the value of AIB and Bank of Ireland today, and look at the amount of capital they're estimated to need, the amount of capital they're estimated to need seems to exceed their present value which would imply that at least one of them could finish up in majority state ownership, if not both."