* ECB's "accommodative" stance creates one-way bet on rates
* LTRO repayments, high or low, seen flattening Eonia curve
* Trade already crowded, leaving slim gains for latecomers
By William James
LONDON, Feb 19 (Reuters) - European Central Bank president Mario Draghi has created a win-win situation for traders in the run-up to Friday's announcement on early repayments of banking sector loans, with short-term rates expected to go anywhere but up.
Traders are banking on the euro zone money market curve flattening over the coming weeks, unwinding a rise in longer-term borrowing costs that has effectively tightened monetary conditions over the last month.
Larger-than-expected early repayments of emergency banking sector loans in January caused money market rates to rise, pushing up the wholesale cost of money that filters through the financial system and drawing the attention of the ECB.
But, that reaction has since moderated and even a larger-than-expected second repayment would be unlikely to prompt another rise because markets believe this would increase the chances of the ECB cutting interest rates to keep policy loose.
Lower-than-forecast repayments, or any signal from the ECB on cutting rates could even drive rates lower, market participants said.
"You could call it a Draghi 'put'. He suggested at the last press conference that the ECB may act if it doesn't like what it sees," said Elwin de Groot, strategist at Rabobank in Utrecht.
"So, if there's too strong a reaction from the market(to the repayment) they may take new measures, and the first best option is maybe a cut in the refinancing rate."
The faster the surplus of liquidity in the banking sector shrinks, the more the money market curve steepens as traders bring forward expectations of when increased competition for scarce cash starts to push rates up.
A Reuters poll on Monday showed banks are expected repay 130 billion euros of the 530 billion euros they borrowed a year ago, when the ECB flooded the banking sector with cash to prevent funding seizing up completely.
That amount is slightly less than the 137 billion euros which was repaid in January when the first of the two three-year lending operations became eligible for early repayment.
"Last time I was expecting more people to bet on higher rates, but Draghi hasn't helped," a trader said, adding that he was expecting a flatter money market curve this time round.
A figure in line with polls would support Draghi's assertion, made at the bank's monthly press conference, that excess liquidity would stay well above 200 billion euros -- the level below which overnight rate are widely expected to start rising. Reuters data shows the surplus stands at 500 billion euros.
However, the "one-way" nature of bets on the direction of the money market has already driven the curve flatter, leaving those late to the party targeting only small gains.
"On the Eonia forward curve we still favour a possible flattening. But, at these level there is only limited room for further flattening," said ING strategist Alessandro Giansanti, highlighting the Eonia forward contract that shows rates are expected to be 21 basis points in February 2014.
"This is about 9 basis points off the highs. . 21 basis points is pricing in excess liquidity (by Feb 2014) of 250 billion -- a level that probably we will get close to."
The gap between the one-month Eonia rate and the two-year rate, both of which measure expectations of the average overnight borrowing cost over the life of the contract, has narrowed to 17 bps from a peak of 31 bps.
"We have already seen quite a correction in the curve... so you might say the market is now reasonably priced. Perhaps there are no big opportunities anymore, but if there are any we should see more flattening," Rabobank's De Groot said.