I think this is a 'risk' sending him to a promotion rival, but not as much as some have made it out to be on twitter etc.
He by his own admission when he first arrived at norwich needed a run of games to get full fitness up and feel his way back into form as his fitness came back. He claimed the only way he could do this was a run of games in the team. He wasn't an instant giant at the back, our defensive turn around in his first season was against arsenal when we managed a clean sheet in the 1-0 win which started the infamous '10 game run'. That was 6 games after seb made his debut.
If he takes 6 games to get up to speed at watford that's only 7 games of him at full fitness, assuming he starts every game. I personally don't think 2 games a week will suit him reading between the lines of his fitness situation last year.
Hopefully then he fires in the last month of his loan and either comes back to us in top form to help us go up or emphatically puts himself in the shop window just in time for january at which point a struggling prem team pays over the odds for him.
Nevertheless, it's a risk and if it backfires badly there will be some serious questions asked of our board.