Is there a way to fix the above issue without setting the organizational level security defaults as "disabled"?
If you use basic authentication, it is not possible without disabling the Azure Security Defaults.
To use basic authentication for SMTP, the requirements are:
1.SMTP AUTH enabled for the mailbox
2.MFA disabled for the mailbox
3.Azure Security Defaults is set to disabled
4.No conditional access policy applied to this mailbox which blocks basic authentication
Otherwise you may need to consider using modern authentication instead.
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