I created a new user account which was not an SSO federated account. I was able to both login using the V2 REST API Authentication Service and also post a discussion to an already created space using the Basic Authentication approach as described here:
So creating a non-SSO account seems to be the solution. Either it is not possible to authorize to the API using an SSO account or possibly further unknown configuration is required to do so. It would be nice to add to this to the docs somewhere.