Second, because firms and households in these countries often borrow in foreign currencies but receive revenues and incomes in the domestic currency, swings in the exchange rate have major effects on the net worth of these borrowers.
In particular, a sharp devaluation, by raising the value of foreign liabilities relative to domestic assets, might bankrupt large segments of the economy, with severe financial and economic implications. According to the fear-of-floating hypothesis, the severe consequences of exchange rate volatility in these countries may lead policymakers to manage their currencies quite closely to damp volatility, no matter what the putative exchange rate regime.