I thought it was a solid creation, but not believable. The Cthaeh is a good example of PRockfuss' stylistic "weaknesses" (which don't need to bother you), which is being emphatic and emotional or rhetorical rather than proving. If he tells you that something is really, really bad, he can be insistent enough that the reader just goes with it. But the horribleness of the Cthaeh can't be that great for reasons of probability. Since it is bound to actual conditions, there is obviously a limit to what it can do and how bad it can be.
The thing tells you only the truth. So either it needs to coincidentally meet a person which is haunted by traumatic experiences (and unable to overcome them, so the Cthaeh might not even make a big difference), or knows somebody who currently undergoes a horrible treatment; or the author buys into an idea of truth that is less informative, useful, necessary or neutral than actively harmful, or can freely be given a harmful bent, and is ultimately impossible for any average individual to bear. Which is contrary to the necessity of (relevant) information, even bad one, in life, and therefore extremely strange (albeit convincing in a minor, melodramatic tradition).
The second reason why the Cthaeh is the most horrible thing in existence, which is not limited to the hearer's psyche, is that it tells you things which will come to pass as long as it gauges the hearer's reactions correctly (which it always does) and so makes the hearer part of the events. Now that is a really cool concept, but it doesn't work either. The likelihood that any hearer is or can be made an important actor in events, again relies on the hearer, their background, capabilities and interests, and the set of conditions in the world, and what difference a piece of information can actually make in it. The suggestion is that the Cthaeh of course chooses the worst possible outcome, but that doesn't make it any more likely that the consequences are momentous or so incredibly harmful.
And the two evils pretty much don't work together, as the first one (traumatise until you lose your personality...) has to fail a little in order for the second one to work, and if the first one can fail, it is admitted that the second one can (since the conditions are related), and in fact both failing contains a gigantic likelihood, making the Cthaeh practically an unscary "mean" fairytale spirit.
It might actually work within his world (which is why one can go with it), even always, but only in a fictional world. Even if it is all-knowing and evil, it is is still completely dependent on the conditions and factors, i.e. the persons and what they could/would actually do (and what difference it can play for the worst outcome).