well, water is probably (don't have any numbers, but this is an educated guess) a better thermal transfer compound than any grease based stuff, even arctic silver. But it's not as good as metal, so to optimize energy transfer as well as minizing risk of a spill, put as little water between the cpu and HS as you can. All you need the water for is to transfer energy to the HS so it can radiate it away. Also, make sure the seal is good. At 50C water has a not-insignificant partial pressure and will want to give off a little steam, so whatever you use to seal the chamber make sure it can take a little heat and pressure.
from what i understand, most water coolers pump the water to a larger radiator to dissipate heat; without a pump the water is only good for moving energy to the actual HS.