A government that undertakes a commitment to target 2% CPI inflation does not, strictly speaking, "borrow in its own currency". Its bonds are an indirect promise to pay, via transversality transitivity (damn!), a specified quantity of CPI baskets of goods and services. In much the same way that bonds under the gold standard were an indirect promise to pay a specified quantity of gold. See my old post.
It is true nevertheless that a government whose bonds are promises to pay money that it itself prints, even if it targets 2% CPI inflation, cannot suffer a liquidity crisis. If there were a run on those bonds, where bondholders wanted to sell and hold money instead, the central bank could and would (to keep inflation on target) simply print as much extra money as people wanted to hold and use it to buy back the bonds they did not want to hold.
It cannot suffer a liquidity crisis, but it can nevertheless suffer a solvency crisis. The Magic Money Tree is real, but not very big. If we assume a currency/NGDP ratio of 5%, and Nominal GDP growing on average at 4% (2% Real GDP growth plus 2% inflation), the Magic Money Tree gives the government that owns the printing press profits worth 0.2% (=5%x4%) of GDP per year. Which isn't very big, and is already built into the government's budget anyway, as the profits from the central bank. In a solvency crisis the government would face a choice between defaulting on its bonds and defaulting on its commitment to not let inflation rise above 2%. Much like a government under the gold standard would face a choice between defaulting on its bonds and defaulting on its commitment to making its money worth a specified quantity of gold. But a solvency crisis like that could not coincide with a deficiency of Aggregate Demand where inflation threatens to fall below the 2% target. Instead it could coincide with an excess of Aggregate Demand, where inflation threatens to rise above the 2% target.
The above describes the Canadian Federal government.
Canadian Provincial governments are different. They do not "borrow in their own currency"; they can't pay their debts by printing money. They can suffer a liquidity crisis and/or a solvency crisis.
Canada is not like other countries. Canadian provinces play a big role fiscally, in taxing, spending, and borrowing. [Can anybody find that lovely graph I saw a few months ago showing Canada at the extreme end of the fiscal federalism measure?] Update: Thanks to Jim Sentance for pointing me to Kevin Milligan's post.
If you drew a line, with a unitary state at one end, and the Eurozone at the other end, Canada is halfway along that line. If you abolish the Federal government, leaving only the Bank of Canada, you get the Eurozone. Eurozone national governments are like Canadian provincial governments.
So what happened in the Eurozone could happen here, at the provincial level, even though it wouldn't be exactly the same. The biggest difference is that someone is in charge who can ultimately control both monetary and fiscal policy at the Federal level and decide who gets bailed out under what conditions.
I am not aware of any problems in the near and foreseeable future. But then I don't trust my foresight. And it may be a good idea to think through how we should respond to problems before they happen, and how we might reduce the probability that they do happen. Under what conditions should the Bank of Canada do a Draghi whatever it takes buying provincial government bonds?