An article in the Economist gives a pretty good picture of what has transpired. The Prime Minister (who had pledged to decrease the number of cabinet-level positions before the 2009 elections and actually did do so in his first cabinet) increased the size of his administration and forewent meritocracy in favor of bringing back politicians who are experienced at politicking, but are generally seen as incompetent. The article's author considers that this is done for the Prime Minister to avoid grudges in a period, in which significant structural reforms are to be brought about. That is a very large part of the truth, indeed.
One can notice that Papandreou has actually put competent ministers in two of the cabinet posts that will prove crucial for the reforms: the ministry for Development and ministry of Health. The former will be run by Michail Chrysochoidis, who did a good job at catching a terrorist group and displayed competence in this Summer's fires; his skills will be necessary for the formation of a new, less bureaucracy-ridden investment framework. The Health ministry is assigned to Andreas Loverdos, hitherto the Labor Minister, who managed to pass a bunch of necessary reforms in the fields of labor relations and social security. That the hapless Louka Katseli was moved from Development (where she failed to produce anything of actual significance, other than a new law favoring bank debtors, against advice to the contrary from the European Central Bank) to Labor is a sign that the Prime Minister feels that enough has probably been done by Loverdos already.
The main reason that old-guard politicians were placed on the cabinet is probably that the structural reforms which have to be passed will go against many vested interests, or rather privileges, which have grown under previous socialist administrations. Papandreou hopes that his freshly-appointed ministers will be able to appease public-sector unions (who have the most to lose from the reforms), mainly the most militant ones; to give but an example, the secretary general of the union of the employees at the Public Electricity Corporation went so far, as to threaten that blood will be spilled and the electric current will be shut down, if the administration dares to touch the corporation or the ridiculously high pensions of its employees, which are guaranteed by the government today. Any violent reactions threaten to completely derail the Greek economy, particularly in its current fragile state, and personal relations with the union leaders might play a role in preventing such reactions.